MADRID—U.S. private equity firm KKR’s proposal to take an almost 16% stake in the troubled Spanish chain NH Hoteles could transform the company as it struggles with almost €1 billion of debt, overexposure in its lackadaisical domestic market for its mostly urban properties and a hide-bound management style, industry experts say.
“NH has long been mentioned as a takeover target since Mariano Pérez Claver took over as president and CEO in February 2011 in representation of Spanish savings bank BFA-Bankia,” said Ivar Yuste, partner at Barcelona-based consulting firm PHG Hotels & Resorts.
NH, Europe´s third-largest business hotel operator and with almost 400 properties in Europe, Africa and the Americas, announced the preliminary KKR offer in a statement to Spain’s stock market regulator, saying the private equity firm proposed buying bonds that could be converted into shares and that the board was studying the offer.
A NH spokesman declined to answer questions on the proposal, saying further information would be released when there was news. A spokesman for KKR operations in Europe also declined comment.
“By acknowledging that they are considering the KKR offer, it shows that the shareholders are taking the idea of a divesture or conversion of debt very seriously,” Yuste said, noting this was the first time this has happened since a planned capital increase deal with Chinese tourism conglomerate HNA collapsed last year.
Agreement with creditors
NH reached a deal earlier this year with its creditors to refinance 76% of its debt and pledged to sell off within three years hotels worth between €200 million and €300 million ($256 million and $384 million) to guarantee payments, but the company has yet taken steps to do so despite interest from potential buyers.
“PHG has been advising buyers for the last two or three years to acquire the (NH) Jolly Madison property in New York through an American (real estate firm), the Brussels City Centre property through a European fund and NH Alanda in Marbella.
“In all these cases, we came up against various obstacles such as price or timing. We are reaching the end of 2012 and all these assets are still in the NH balance sheet and they shouldn’t be there,” Yuste said.
According to Spanish news reports, KKR could take a stake in the chain by purchasing a 15.7% share held by BFA-Bankia valued at around €107 million ($137 million), through a capital increase or both.
Like other Spanish lending institutions, BFA-Bankia is being urged to shed its equity stakes ahead of a European Union rescue package for the banking industry. Other Spanish savings banks with a combined total of 12% of NH are Ibercaja and Kutxa, and they might be willing to exit as well.
KKR’s Spanish strategy
Just before the KKR offer was announced, the firm’s co-chairman and co-CEO, Henry Kravis, told a news conference in Singapore the firm was looking at investments in Spain because of the country’s debt problems.
KKR, he said, was particularly interested in opportunities in the hotel, real estate and leisure areas.
Hotel sector analysts argue now is an ideal time to make offers as the real estate market in Spain is reaching the bottom and the situation with the sovereign debt and the banking sector’s troubles will trigger a big fall in asset value in the coming months.
“NH is a solid product concept in its niche segment and enjoys significant brand awareness in markets like the Benelux for 21% of their revenue, Germany and Central Europe which accounts for 23% and Italy at 14%,” Yuste said.
As with all large companies, NH is also challenged by its sheer size.
“For instance, NH only started externalizing housekeeping and cleaning in the Madrid properties very recently. Trade unions are strong. Also, the high level of recurrent fixed charges derived from NH owning its own hotels makes the company too rigid,” he said.
In its latest results, the chain announced it lost €50 million ($64 million) in the first nine months of this year, compared to earnings of €1.4 million ($1.8 million) for the same period last year.
If the offer goes ahead, KKR will have a say in selling off NH’s non-strategic assets, changing from leases to management contracts for its Spanish urban properties and boosting its presence in Latin American countries like Brazil, Colombia and Peru.
“Bear in mind that Latin America represented only 6% of NH’s revenue in 2011,” the PHG consultant said. “This market represents a significant upside for them in the same way that Marriott took the (Spanish) AC Hotels brand into that region.
“On the contrary, NH has overexposure in Spain with 25% of its revenue originating there in 2011.”
In perhaps another indication that big changes are in the wind for the company, NH announced this month that Federico González Tejera, deputy general manager for EMEA marketing and sales at Disneyland Paris, was named to take over from Claver as CEO.