UK: Successfully Managing A Hotel Portfolio Transaction

Last Updated: 1 November 2006
Article by Tom Page

The last year or two in particular have seen a number of hotel portfolio sales by some of the large hotel operating companies. This trend has been increasing and several portfolios have either been sold in the last year or are on the market for hundreds of millions of pounds. This trend is part of the separation of "bricks from brains" that is believed to be the way that hotel operating companies can release capital from their asset-heavy balance sheets and improve their overall return on capital employed.

These disposals in the past were often accompanied by a lease back of the hotel property. More recently, the trend has leant heavily towards sale-and-manage-backs - the disposal of the property assets and business accompanied by a management agreement back to the operating company.

Managing a large portfolio disposal (and it is usually the seller that drives the process) can be very different from a single asset disposal. They are complex and time-consuming - even more so if the portfolio is located in more than one jurisdiction.

There are a number of considerations that both sellers and buyers of hotel portfolios should bear in mind to ensure a smooth and successful transaction:

  • For the seller, it is vital to anticipate the needs of prospective buyers and give them comfort by providing them with a reassuring level of due diligence, and yet foster a competitive bidding environment that should deliver optimal offer prices.
  • For the buyer in an auction process, it is important to demonstrate that it can provide the best offer, not just in respect of price, but also deliverability and credibility, two factors that will be important in a seller’s assessment of the offer. This must be done under pressure not to incur significant expenditure in case the offer proves to be unsuccessful.

To read the full article for tips on how you can manage this process to your advantage, please see below:


Full Article

The last year or two in particular have seen a number of hotel portfolio sales by some of the large hotel operating companies. This trend has been increasing and several portfolios have either been sold in the last year or are on the market for hundreds of millions of pounds. This trend is part of the separation of "bricks from brains" that is believed to be the way that hotel operating companies can release capital from their asset-heavy balance sheets and improve their overall return on capital employed.

These disposals in the past were often accompanied by a lease back of the hotel property. More recently, the trend has leant heavily towards sale-and-manage-backs - the disposal of the property assets and business accompanied by a management agreement back to the operating company.

Managing a large portfolio disposal (and it is usually the seller that drives the process) can be very different from a single asset disposal. They are complex and time-consuming - even more so if the portfolio is located in more than one jurisdiction.

There are a number of considerations that both sellers and buyers of hotel portfolios should bear in mind to ensure a smooth and successful transaction:

  • For the seller, it is vital to anticipate the needs of prospective buyers and give them comfort by providing them with a reassuring level of due diligence, and yet foster a competitive bidding environment that should deliver optimal offer prices.
  • For the buyer in an auction process, it is important to demonstrate that it can provide the best offer, not just in respect of price, but also deliverability and credibility, two factors that will be important in a seller’s assessment of the offer. This must be done under pressure not to incur significant expenditure in case the offer proves to be unsuccessful.

Selling a portfolio

Portfolio sales normally result from an owner’s decision to put the portfolio on the market and it is therefore the seller that drives the process and sets the parameters for the transaction. However, in order to make the transaction run smoothly and to maximise the price received, a seller should always anticipate a buyer’s requirements and remove any problems, hurdles or risks that would otherwise cause a bidder to reduce its offer price.

On a sale and manage back transaction, a seller will not be selling to a competing operating company so the portfolio is likely to be targeted most heavily at financial buyers such as private equity houses, structured finance teams of banks or consortia of private investors, or even more than one of these. There are conflicting interests between a trade seller and a financial buyer in how the auction process is run and this is a fine balance for the seller to manage.

A seller will want to maintain competitive tension by keeping multiple bidders in the auction process right up to the end of the disposal process if possible. This will keep up the price and ensure no dilution of the contractual terms negotiated with the buyer over a long period of exclusivity. In contrast, a financial buyer will not want to incur significant expenditure in the auction process until it knows it has some form of exclusivity to minimise the risk of wasted costs on an unsuccessful bid.

Seller’s due diligence reports

Both of these concerns can be met to some extent if a seller is able to provide bidders with a significant level of due diligence already undertaken on their behalf. This might take the form of:

  • Certificates of title to the hotel properties
  • Financial due diligence report on the hotel businesses and operations
  • Surveys (structural and environmental)

It is also possible to see seller’s legal due diligence reports or tax opinions being made available, especially if there has been some complex pre-sale restructuring.

It may appear that providing all these reports can increase the seller’s expenses. But financial buyers will incorporate acquisition costs into their financial model. If the buyer recognises the cost savings available, a seller should see higher offer prices.

If the seller is providing such reports to a buyer, it is important that the seller agrees with the firms providing the reports that they will address their reports to the buyer, the buyer’s equity investors, the buyer’ lenders and any other members of the lending consortium. Too often this is not addressed up front and there are last minute arguments about the extent of the addressees. Failure to have these reports addressed to all these entities may prevent the lending bank from being able to syndicate the debt, thus affecting the buyer’s ability to complete the transaction.

Buying a portfolio

A bidder for a portfolio does not need to worry as much about structuring the transaction process, but is more concerned about presenting the best offer to the seller in order to win the auction.

Obviously the best offer will usually consist of the highest price, but a seller may be considering other factors, such as deliverability of the price and the transaction; the robustness of the offer (i.e. is it subject to many vague assumptions); the speed at which the bidder can complete; and, in sale-and-manage-backs particularly, the identity of the ongoing owner of its hotels, as there will be a long term relationship between the new owner and seller as manager of the hotels. A bidder should determine which of these factors is most important to the seller and structure its offer to satisfy these requirements.

There will always be tension between the need to advance the transaction process as much as possible to demonstrate commitment to the offer, at the same time without incurring significant costs that may be wasted if the bid is unsuccessful. Any bidder who does commit to incurring advisers’ costs in order to advance the process and get ahead of other bidders can significantly improve their chances of winning the auction, especially if their price is competitive. Sometimes arrangements can be made between seller and bidders to ensure that bidders are able to advance the process in a competitive scenario, such as a contract race, without significant risk on costs.

Conclusions

For a portfolio seller, spending the time and resources in advance of the auction will be time and money well spent in minimising timetable and price slippage once financial buyers do engage. For a buyer, identifying the seller’s key priorities and delivering against them will assist in winning the, now hotly contested, auction. For both, having the right advisers to help manage and conduct the process is vital in ensuring a smooth and successful transaction for all involved.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 01/11/2006.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.