What a Brookfield-Leela deal means for the hotels sector
News of a potential Brookfield-Leela Hotels deal sent soaring share prices of hotel companies EIH Associated Hotels Ltd and Taj GVK Hotels & Resorts Ltd
After struggling with debt for about a decade, it seems that Hotel Leela Ventures Ltd will get a reprieve from Canada’s Brookfield Asset Management deal. Mint reported that Brookfield is close to buying a majority of Leela hotels assets for ₹4,500 crore, which will be more than sufficient to take care of the company’s debt of ₹3,798 crore (as of 31 March 2018).
While exact details are not known, the report indicates that the company will manage the hotels after selling the assets. Apart from the relief from debt for Leela Hotels, Brookfield’s entry—if true—will raise the profile of the sector, and may well be the harbinger of more investments in the sector.
In fact, investors seemed excited enough to effect a rally in shares of some other hotel stocks—such as EIH Associated Hotels Ltd and Taj GVK Hotels & Resorts Ltd—which rose 20% and 7%, respectively.
The luxury hotels sector, which has been battling prolonged recession for about a decade, is gradually beginning to look up.
According to Rashesh Shah, an analyst at ICICI Securities, “Given the trends visible over the last three years on occupancy levels, which is gradually rising on account of better demand from business segments, healthy growth in foreign tourist arrivals, a booming domestic travel market, room tariffs cannot remain stagnant much longer.”
If meaningful investments are added to the mix, returns can improve considerably going forward.
In Leela’s case, defaults on interest payments had landed the prestigious hotel with JM Asset Restructuring Co., which holds a majority stake in the hotel. Brookfield’s entry can change things.
As a global alternative assets management firm with its gigantic presence in real estate and private equity, it is not interested in day-to-day management of hotels.
Hotel Leela currently manages four properties in addition to the five it owns, four of which are reckoned to be a part of the Brookfield deal.
Future returns for shareholders would hinge on the contours of the deal. Depending on whether the new owners wish to continue as a listed entity, that may raise possibilities of either buyback of shares or an open offer to buy out minority investors.
But, given the large debt on the company’s books, it will be foolhardy to expect a high valuation for the company’s equity.
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