Promoters clear on retaining control, will raise stake after initial dilution.
Two of the world’s leading private equity (PE) funds, Blackstone and Bain Capital, are in negotiations with the Nair family — promoters of the luxury Hotel Leelaventure chain — to invest Rs 600 crore in the company, said two independent sources familiar with the ongoing transactions.
The hospitality chain recently said it would be looking at raising funds by offering preferential shares to PE funds. This will be part of a bigger fund-raising initiative of Rs 1,550 crore to help Leela deleverage the balance sheet over the next 24-30 months. The additional capital will be used entirely to retire part of the Rs 3,800-crore debt the company currently has on its books.
Leela has mandated Ambit to advise it and find potential PE suitors. Both Blackstone and Bain refused to comment on the potential transaction. When asked, Blackstone India chairman, Akhil Gupta, said he would not talk about specific deals. Bain Capital India managing director, Amit Chandra, said, “As a matter of policy we do not comment on any deals.”
Vivek Nair, vice-chairman and managing director of Hotel Leelaventure, refused to comment on specific names but said he was confident of closing a deal within the PE transaction in the next four months. By then, the Delhi property would have been officially inaugurated and Chennai would also be just a few months from opening. “All I can say now is that we would like to partner with well-known PE funds that have a large diversified portfolio or sovereign wealth funds. Both have long-term outlook,” Nair said.
Another investment banking source said on condition of anonymity that feelers had also been sent to Warburg Pincus. This could not be independently verified.
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Valuation issue
Leela’s management is clear the PE deal will not happen at the current market price of Rs 39.8 a share, but at a significant premium. “The current price does not take into account our new and upcoming properties in Udaipur, Delhi and Chennai. We have already incurred a Rs 3,000-crore capex on them. But soon, they will generate cashflows and by 2012-13, their operations will stabilise with one full year of operations. We are expecting a 50-60 per cent jump in our total turnover. So, the new investors will have to take all that into account and arrive at a valuation,” Nair added.
Nair said, typically, one expected a 20-25 per cent mark-up if there were no new properties in a company’s pipeline. “But in our case, we shall have six to seven operational hotels in the next five years from the current four. So, our growth plans are there for all to see,” he noted. And, with the hospitality sector witnessing deals being struck at 23-24 times Ebitda (earnings before interest, taxes, depreciation and amortisation) multiples, a benchmark has already been set.
The company is expecting Rs 160 crore additional cash flows from the Delhi property alone every year, and Rs 100 crore from Chennai.
Clear on control
After the capital infusion, the PE investors will hold 14.9 per cent stake in Leela, just below the mandatory open offer threshhold of 15 per cent. As the company will be issuing fresh equity, the promoter’s stake will only marginally get diluted, to 50.6 per cent from the current 54.61 per cent. Interestingly, just like East India Hotels (EIH), ITC holds a strategic stake of just over 11 per cent in the company.
“We are not roping in PE investors as a bulwark against any incumbent investor. In any case, after the PE transaction, the promoter group will hike its stake once again to 55 per cent or more. We have already planned that,” Nair said.
The management said the PE fund raising was mainly to realign the debt-equity ratio, keeping in mind two foreign currency convertible bond (FCCB) redemptions. Leela has already prepaid the first tranche of ¤60 million of FCCBs, while the second tranche of $100 million is up for conversion in April 2012. The quantum raised from PE investors would be equal to the sum required for the entire redemption.
The funders
It is still not clear if Blackstone’s separate real estate fund will be making the investment in Leela, but chances remain, as that fund also specialises in hospitality sector investments. In 2007, it grabbed headlines in its public to private buyout of Hilton Hotels worldwide, for a whopping $26 billion. Its portfolio also includes the Righa Royal Hotel in Manhattan.
In India, ever since it set up its local franchise, Blackstone has been the most active amongst its global peers, cutting 11 deals, including controlling stakes in garment exporter Gokaldas and Intelenet, a business process outsourcing firm.
Blackstone recently made a $300-million investment in Moser Baer’s power venture. Its co-founder and chairman, Stephen Schwarzman, recently told the Indian media the fund could invest another $2 billion in the country during the next three years. The fund’s PE exposure adds up to $1.2 billion currently. Blackstone was expected to close its first real estate sector deal this year, investing Rs 200 crore in Bangalore-based Embassy Properties.
Established in 1984, Bain Capital currently manages approximately $65 billion in assets under management under various divisions, which includes both private and public equity and leverage buyouts. A relatively late entrant in India, it has made two PE investments, in Himadri Chemicals and Liliput Kidswear. Though the consumer segment is a key focus areas, it has not yet made any hospitality sector investments.