A year after taking the company public, Patu Keswani, chairman and managing director, Lemon Tree Hotels, has set his eyes on New York-based billionaire Nicolas Berggruen's hospitality firm Berggruen Hotels that owns and operates a chain of mid-market hotels in India under the Keys Hotels banner.
In an exchange filing, Lemon Tree said that it has signed a non-binding agreement with Berggruen Hotels Pvt Ltd (Keys Hotels) and its Mauritius incorporated holding company Berggruen Investments to acquire 100% shareholding. The stake will either be acquired by Lemon Tree directly or through its subsidiaries, subject to due diligence and obtaining requisite approvals, the company said in the filing.
While valuation figures were not disclosed, Kabir Kewalramani, managing director, Berggruen Holdings India (the investment arm of Nicolas Berggruen), had in an earlier interaction (i.e. May 2017) told DNA Money that it has the largest exposure of over $100 million in the Indian hospitality industry.
Interestingly, Berggruen Hotels has been in the market for a while now and many international hotel companies showed interest in the past. However, the deal never happened for various reasons including a valuation mismatch between the parties involved. So why is Keswani keen on taking control of Keys when every hotel company is looking at an asset-light approach to expand their operations?
There are three to four reasons for pursuing the company, Keswani told DNA Money. "The mid-market segment in India is very fragmented and this (Keys Hotels) is the fourth largest mid-market hotel company with 1.5% of the inventory in this category of hotel accommodations in the country. So the first reason is it's a consolidation play. Secondly, most of their hotels are in cities where Lemon Tree is not present. So post-acquisition, the network effect will give us a fair share of the market in those cities," he said.
The third advantage, Keswani said is that Keys Hotels has a smaller team in fewer cities, has less resources and relative to Lemon Tree it's underperforming significantly. "The difference in the pricing of our rooms is 40%. While our average is say Rs 100 they are at Rs 60. So taking all these factors in mind, we will buy a certain amount of operating ebitda (earnings before interest, taxes, depreciation and amortisation) at a certain multiple. I am very certain that I will be able to narrow the price difference by 50% within 12-16 months. This combined with cost control measures, we'll be able to double the ebitda in a fairly short period," he said.
The fourth advantage is in the form of getting access to a very talented pool of people. In fact, Keswani is certain about retaining all the hotel staff post the conclusion of this transaction. "Obviously, we cannot have two people in the same role in the same area. But we will definitely retain every employee at every Keys hotel," he said. As for the management team at the corporate office is concerned, "I haven't actually thought about it," he said.
The Keys hotels portfolio comprises seven owned hotels with 936 guest rooms in six cities. The company also has a land parcel in Goa and Raipur for future developments. In addition to its owned assets, it also has 975 guest rooms by way of management/ franchise agreement i.e. asset-light model. In total it owns/ manages/ operates 21 hotels with 1,911 guest rooms in 19 cities.
"We haven't taken hotels on management contract in many cities because most of them didn't meet our brand standards. That's not the case with the Keys Hotels portfolio, it may require some tweaking though. This will not call for a significant amount, may be a few lakhs per room, and will be done through internal cash flows. So the plan is to rebrand the Keys portfolio and operate it under Lemon Tree or Red Fox," said Keswani.
On the valuation expectations, Keswani said that being work in progress it is not relevant as of now without sharing any specific details including the company's approach to funding the acquisition. While there are talks of a share swap approach, Keswani completely ruled out that possibility.
Another aspect that Keswani will have to consider in this valuation exercise is stakes held by some of the founding members and executive(s) in the Keys Hotels management team. This will be in addition to Nicolas Berggruen's stake in the hotel company. While Berggruen Holdings did buy out stake held by some founding members, including stake held by former CEO Sanjay Sethi, there are other executives who continue to hold shares in the company.
For instance, Vikas Chadha, who was holding the chief finance officer (CFO) position in the hotel company till a few weeks ago, still has "carried interest" in Keys Hotels. Carried interest is similar to ESOPs (employee stock options) and gives one a certain percentage in the company's valuation. Chadha, who is set to take up a group CFO position in a new company with multiple lines of businesses including hospitality, could not be reached for comment on whether he will also exit his shareholding in Keys Hotels.
BRAND NEW RED CARPET
- $100 mn – Berggruen has exposure to Indian hospitality industry
- 1.5% – total inventory Keys has in mid-market hotel segment
- 1,911 – Guest rooms Keys Hotels has across 19 cities
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