Home / Companies / Leelaventure may sell 24% stake to cut debt

Mumbai: Hotel Leelaventure Ltd may sell at least 24% stake to a financial investor to reduce debt as it charts an asset-light model for expansion, the luxury hotel chain’s top executive said.

“We are talking to three to four international investors, who recognize our expertise in running hotels," said Vivek Nair, chairman and managing director of the firm, which owed lenders 5,033.81 crore on 31 March.

“They will come in as financial investors, including international funds, sovereign funds and tourism-related conglomerates. We should be able to conclude all these deals before April," Nair said on Saturday night in an interview.

Nair spoke after his firm announced the sale of its hotel property The Leela in Goa to Malaysia-based conglomerate MetTube Sdn Bhd for 725 crore on Saturday. The property is being sold through Ceres Hotels Pvt. Ltd, a unit of MetTube.

“We want to bring down the remaining 4,500 crore of debt through a combination of equity and debt in a manner that we don’t lose majority control of the company. We may sell at least a 24% stake to a financial investor," Nair said.

Nair said Leela can emerge from its debt woes in the next six months, adding its days of struggling with valuations and debt burden are over. “Now, we need patient investors." The money from the Goa property sale will go to retire the debt, Nair said.

Leelaventure is planning to raise foreign currency debt bearing interest below 5% compared with local loans, which cost over 10%, Nair said, adding the merchant banking division of financial services conglomerate JM Financial Group is helping the company raise debt and find an equity investor.

Troubled loans are usually referred to the corporate debt restructuring cell of lenders after a majority of them approve a recast, which could entail a lower interest rate, a longer repayment period, or the conversion of overdue interest into loan principal.

In 2011, Hotel Leelaventure sold its luxury hotel, Leela Kovalam, in Kerala for 500 crore to Travancore Enterprises. In 2013, it sold its IT Park Building in Chennai for 170.17 crore to Reliance Industries Ltd.

In March, the company said it plans to sell its hotels in Chennai and Goa. Nair said Leelaventure is now trying to avoid further asset sales. According to the terms of its corporate debt restructuring, it must sell assets to reduce debt.

Leelaventure now plans to sign contracts with hotel owners to operate their properties under the Leela brand, under so-called management contracts.

A leading hospitality consultant, requesting anonymity, said that is the right course of action for Hotel Leelaventure to take, as such expansion does not add to debt.

“Hotel Leela is a strong brand. So it will not find it difficult to find business. But it may find trouble getting investors at the company level, considering the poor market sentiments," he cautioned.

Mandeep Lamba, managing director (hotels and hospitality) at property consultant JLL India, agreed this is the right strategy as the company can leverage on the brand built over years.

“At the moment, because they are cash-strapped, they do not have the ability to build hotels; but they certainly have a brand that they can further build upon," he said.

The company’s debt rose after the global credit crisis of 2008, when it went on a rapid expansion plan by acquiring land across the country.

After its 2008 expansion in Bengaluru, the company bought land in Chennai, Pune and Agra, mostly funded by debt and internal accruals, spending about 3,000 crore. After the financial crisis, the demand in the hospitality sector fell, while interest costs soared.

“Seeing the success of our Bengaluru property, we bought land in Chennai, Pune and Agra. All together, we spent about 3,000 crore. So this 3,000 crore became 5,000 crore now, only because of the galloping interest. When we built the hotel, it was 8-9%. But it has reached 12%," Nair said.

Krishna Deshika, chief financial officer at Hotel Leelaventure, said the Chennai hotel sale was on hold since depressed property prices had affected valuations. Neither the company nor JM Financial Asset Reconstruction Co., which has purchased loans from Leelaventure’s creditors, wanted to sell it cheap, he added.

Apart from Goa, Hotel Leelaventure operates five properties in Mumbai, New Delhi, Bengaluru, Chennai and Udaipur.

Deshika said leading international brands run hotels in asset-light models for management fees, which are typically 7-8% of the hotel’s revenue, including reimbursement of marketing expenses.

Leelaventure will continue to operate the Goa property under the Leela brand for a management fee even after the sale, Nair said.

“We are already operating hotels at Gurgaon (The Leela Ambience) and at Kovalam in Kerala (The Leela Raviz) under management contracts. We will be taking over the management contract of The Leela Ambience Convention Hotel in Delhi starting 1 January 2016," Nair said.

Nair said Hotel Leelaventure would have at least 14 hotels with over 2,200 rooms under management contract in the next one-two years, apart from five hotels of its own.

The hotels under management would include The Leela Bharatiya City (Bengaluru), The Leela Palace (Jaipur), The Leela (Chandigarh) and The Leela Lake Ashtamudi (Kerala) among others. “We are also planning to take over the management contract of Leela Palaces in Seychelles, Abu Dhabi and Dubai," Nair said.

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