The Singaporean owner of the CDL property and Millennium & Copthorne hotel groups, Hong Leong, has reached agreement with independent directors of its London-listed hotel company on an offer price to assume full control of that London business.
The London company holds the controlling interests in the group’s 2 NZX-listed subsidiaries, Millennium & Copthorne Hotels NZ Ltd, which in turn owns 66.42% of CDL Investments NZ Ltd.
For that reason, the London buyout requires New Zealand Overseas Investment Office approval and an unconditional exemption by the NZ Takeovers Panel from the requirements of rule 6(1) of the NZ Takeovers Code, which affects changes in voting rights of the 2 NZX-listed companies.
Those requirements mean the London buyout offer won’t be formally made until the 2 New Zealand authorities provide their approvals. The offer would then proceed within the next 4 weeks.
Ultimate control of the worldwide empire is in the hands of Singaporean magnate Kwek Leng Beng & his family, through Hong Leong Investment Holdings Pte Ltd.
Hong Leong’s main Singapore business, City Developments Ltd, reached agreement with the independent directors of Millennium & Copthorne Hotels plc last Friday on a price to put to minority shareholders to acquire the 34.8% it didn’t already own.
That price has been accepted by 3 large shareholders in the UK listed company which own 43.6% of the minority shares. The agreement stipulates that CDL can’t pursue full takeover unless it wins 50% minority support.
The offer price, 685 UK pence cash (£6.85), represents a 37% premium over the closing price last Thursday of 500p, and a 46% premium over the volume-weighted average of the previous 30 days, 469p. CDL made its initial proposal on 23 May, when the price was 466p.
The final offer values Millennium & Copthorne UK at £2.277 billion.
This offer is up 65p (including a 20p special dividend) from one CDL embarked unsuccessfully on in December 2017, when acceptances fell 2.9% short of the 50% required to proceed further. 3 shareholders with a combined 12.7% of the total and 36.6% of shares not in CDL hands rejected that offer, and CDL only reached 47.1% support, so the offer lapsed.
Curious Kwek reasoning
CDL group chief executive Sherman Kwek gave the reasons on Friday for wanting full control:
“Taking M&C private is in line with CDL’s strong focus on boosting recurring income and enhancing underperforming assets. The offer enables shareholders to exit an illiquid stock at a significant premium. We believe that a privatised M&C will be in the best position to navigate the increasingly challenging & competitive global hospitality landscape with agility & nimbleness. M&C will be able to leverage CDL’s significant resources, comprehensive real estate capabilities & global network to reposition its assets and drive sustainable hotel performance.”
Millennium & Copthorne was listed in London in 1996. Because of CDL’s high stake in it, Mr Kwek said there was little possibility of any third party emerging, so this buyout offer “is likely to be the only liquidity event that M&C shareholders will have to benefit from in the near to medium term”.
3 broad reasons
Mr Kwek’s reasoning for this buyout is probably applicable more generally in the sector:
- 1. The M&C Group faces a number of challenges & a highly competitive landscape:
CDL believes the M&C Group faces a number of challenges despite a supportive lodging cycle, including:
- pressure on profit margins, principally caused by increasing repair & maintenance costs
- rising dependency on online travel agents
- rising labour costs caused by structural factors such as unionised labour & national minimum wage legislation, and
- intensifying competition from largescale asset-light hotel conglomerates and consolidation of large hotel brands globally such as Marriott with Starwood, building pressure on other hotel brands.
“In addition to this, in the UK, the business faces a challenging business outlook given the uncertainties presented by Brexit, where many experienced European employees in the hotel & catering industries are expected to relocate to other European Union countries, resulting in a shortage of skilled labour & more competitive bidding for existing labour that stays in the UK.
“In the US, the business faces challenges of:
- potential declines in UK & EU tourist travel due to the weakened £ & € rates against the $US, and
- excess hotel supply in key locations such as New York.
In Asia, M&C faces multiple issues, including escalating geopolitical tensions, resulting in a dampening of demand in Seoul, Tokyo & mainland China.”
- 2. A long-term strategy with significant but targeted capital investment to reposition assets is required:
“CDL believes significant expenditure is required across many of the M&C group’s properties as part of a long-term strategy focused on unlocking value. A well structured refurbishment programme, with specialist teams focused on enhancing core infrastructure & customer service levels, will be required.
“Accordingly, whilst a programme of material capital investment may adversely impact M&C’s earnings & cashflows in the near term, there can be no guarantee that it would necessarily deliver improved returns in the medium term.”
- 3. Taking M&C private will make it a more nimble, flexible & efficient organisation and will provide it with the ability to further leverage CDL’s significant infrastructure & resources:
“To meet M&C’s challenges & long-term financial requirements, CDL believes M&C’s hotel business can be best navigated if the company becomes a private entity.
“If M&C is taken private, CDL could provide M&C with direct access to CDL’s larger infrastructure as a diversified, global real estate operating company. CDL believes M&C can leverage on CDL’s network, financial resources & its execution capabilities to effect a more efficient turnaround.
“M&C could also benefit from CDL’s longstanding track record & experienced inhouse team of project experts who can execute a well structured refurbishment programme with lower cost and at a quicker pace.
“Taking M&C private would promote nimbleness & flexibility to address the most important issues affecting M&C’s operating performance, thereby providing the company with a distinct advantage in a highly competitive lodging operating environment.”
Fully or mostly in the fold – does it really matter?
CDL has been developing & managing properties for 55 years, and for 31 years in New Zealand. It’s developed 43,000 homes and owns 1.7 million m² of lettable office, industrial, retail, residential & hotel space globally. In 2018, its revenue was $S4.2 billion, pretax net profit $S875.5 million, net asset value $S10.1 billion at 31 December.
For all that, its approach in New Zealand has been extremely cautious. My impression is that this is a group-wide business attitude. Given that, in New Zealand, the Singaporeans acquired 2 1980s high-fliers that went spectacularly bust in the 1987 sharemarket crash, their attitude has proven a better course for enduring business – but that doesn’t make the talk of being nimble & flexible ring true.
Were it true, there would be no need for talk of taking everything inhouse. All Hong Leong/CDL businesses are tightly held – they’re listed on sharemarkets for Hong Leong’s benefit, not for comparatively tiny groups of minority shareholders.
Millennium & Copthorne UK has been in business for 23 years, long enough to splash some paint around.
What Mr Kwek is now talking about is what minority shareholders have expected all along: “CDL intends to… identify opportunities to improve the operating & financing efficiency of its hotels by leveraging on CDL’s infrastructure, network, financial resources & execution capabilities.
What minorities haven’t expected is a poor excuse for management failure – for the extreme caution: “However, given these operational challenges, CDL believes that the CDL Group will have to become increasingly involved in the operational & financial management of the M&C Group.”
Mr Kwek said M&C would continue to conduct the same business, but suggested one change might be to introduce different asset management structures: “Such changes to specific hotel assets may include engaging third party operators on a selective basis to manage hotel assets that M&C owns, as M&C announced in January 2019 that it had done with The Biltmore, Mayfair, or by operating through a licensing model, through joint ventures or other arrangements where M&C manages hotel assets on behalf of third parties.”
Given that Hong Leong/CDL control group appointments internationally – and, at the London company, Kwek Leng Beng himself is in the chair and 2 other family members are on the 7-member board – being fully in the fold could hardly be different from the present state of mostly so.
Hong Leong Investment Holdings Pte Ltd is the New Zealand businesses’ ultimate parent. It owns 75.78% of Millennium & Copthorne Hotels NZ Ltd, which in turn owns 66.42% of CDL Investments NZ Ltd.
The Singaporean holding comes via various subsidiaries, including CDL Hotels Holdings NZ Ltd, whose immediate 100% parent is the UK listed company.
The group has 21 hotels in New Zealand with a range of ownership shares, 24 in the UK, 20 in the US.
Outside London, New York & Singapore, the Australasian portfolio provided the best revpar (return/available room), and by far the highest gross operating profit margin. 2018 revpar in £, margin:
Australasia: £73.13, 49.0%
London: £101.89, 41.0%
New York: £165.49, 15.6%
Singapore: £83.56, 39.3%
Whole portfolio: £81.57, 30.5%
Attribution: Company release, annual report, offer document.