SINGAPORE

Not too much of a stretch: The hotel business needs to generate growth of 6 per cent a year indefinitely in its free cashflow to cover average cost of capital of 10 per cent.

At a price tag of $1.72 billion, how much does US private investment firm Colony Capital need to rake in from Raffles Holdings' hotel business to justify the purchase of the hotel network? 

That number, if it can be estimated, will indicate if Colony Capital has bagged the deal at a fair price.

BT's calculations show the hotel business needs to generate growth of just 6 per cent a year indefinitely in its free cashflow to cover an average cost of capital of 10 per cent. From this perspective, it's not too bad a deal for Colony. More of this later.

The transaction, we were told, represents a 64 per cent premium to the net book value of the hotel business assets. Looked at this way, the initial reaction was that Raffles Holdings is getting a good deal.

But net book value captures historical costs - that is the amount paid for by Raffles Holdings when it first acquired or built the assets. Over the years, that value would have been reduced by the amount of depreciation and amortisation charged annually.

In other words, that number does not represent the worth of the assets. An asset's worth is determined by the cashflows it can generate going forward.

And Colony has valued the transaction assets at an enterprise value of $1.72 billion. This comprises an aggregate cash consideration of $1.45 billion for Raffles Holdings, the assumption of pro forma net debt of $220.7 million and pro forma minority interests of $53.4 million as at Dec 31, 2004.

Now let's work through some of the business numbers to see how Colony can justify the $1.72 billion price tag.

According to Raffles Holdings, the hotel business had a turnover of $527.8 million and earnings before interest, tax, depreciation and amortisation (Ebitda) of $89.7 million for the year to Dec 31, 2004. Its net profit before tax, minority interest and extraordinary items amounted to $32 million.

From the numbers, we can roughly work out the free cashflows available to all the claim-holders in the group, including stock-holders, bond-holders and banks.

The free cashflow to the group can be derived by taking the earnings before interest but after tax, adding back depreciation and taking away capital expenditure and increase in working capital.

Raffles Holdings' depreciation is about $50 million a year. And assuming that capital expenditure plus increase in working capital amounted to some $23 million, the rough estimate of the free cashflow to the group worked out to about $59 million for 2004.

Given the expected rebound in the hotel industry both in terms of room rates and tourist arrivals, let's assume that this $59 million number can grow by 20 per cent to $71 million this year. From then onwards, the cashflow would have to grow at least 6 per cent a year indefinitely for the deal to make sense for Colony. That's assuming that Colony's weighted average cost of capital (WACC) is 10 per cent.

If its WACC is 12 per cent, then the cashflow growth rate would have to be 8 per cent a year.

For comparison purposes, CapitaLand's WACC was 7.3 per cent in 2004.

So if Colony is able to ride on the emergence of the Asian economies, and also create synergy between Raffles Holdings' hotel business and its own, then perhaps it has indeed paid a fair price for the assets.

Meanwhile, the earnings yield of Colony's $1.72 billion investment would come to about 4.1 per cent this year based on the free cashflow estimate of $71 million.

From the perspective of CapitaLand, which owns 60 per cent of Raffles Holdings, if it is able to deploy the funds and generate a yield in excess of 4.1 per cent, then it too makes sense for it to sell the hotel assets.

In short, it may turn out to be a win-win deal for all - not least the minority shareholders of Raffles Holdings who saw their shares jump by 33 per cent yesterday - the day after the deal was announced. - by Teh Hooi Ling    BUSINESS TIMES    20 July 2005

Raffles sells 41 hotels for $1.45b

Raffles Holdings is selling its entire hotel business of 41 properties, including Singapore's 118-year-old Raffles Hotel, for $1.45 billion cash to a US private-equity investor, retaining only its interest in the multi-use Raffles City complex.

Under the deal, Los Angeles-based Colony Capital will pay a 64 per cent premium above the hotel business' net tangible assets, and Raffles Holdings will net a gain of $605 million and keep its 45 per cent share in Tincel Properties, which has a $700 million stake in the Raffles City. The complex houses Swissotel and Stamford hotels, Raffles City Shopping Centre, Tower Blocks and Convention Centre.

Analysts agree that the sale, which will give Raffles Holdings shareholders a special 40 cent dividend - a total of $816 million - is a good deal, especially as Raffles Holdings will get to keep Swissotel Stamford and Raffles The Plaza.

Colony, a fund that focuses on real estate, owns among other assets, the Amanresorts hotel chain, London's Savoy Group, and casinos in Europe and Atlantic City in the US. The buy will add 15 Raffles and 26 Swissotel hotels and resorts in 35 countries to Colony's portfolio, of which 14 are owned by Raffles, including Singapore's Merchant Court Hotel and Raffles hotels. The rest are management contracts.

Colony will also assume Raffles Holdings' debt and minority interests of about $274.1 million.

Raffles Holdings will have an option to buy Raffles Hotel at market value after 82 years - the time when the tenure of that part of the hotel which has a 99-year lease runs out. The entire property consists of the land on which the hotel is built, which has a 999-year lease and the Arcade section, which has a 99-year lease.

The deal is likely to be approved by Raffles Holdings shareholders, as 59.7 per cent shareholder CapitaLand will vote in favour of it. CapitaLand will get a dividend of 18 cents per share, according to one analyst's estimate. CapitaLand chief executive Liew Mun Leong said the company will decide if it wants to issue a special dividend closer to its financial year-end in December 2005.

'Raffles definitely got a good deal, which is on the high side, based on the last-known numbers,' an analyst said. 'If you value Raffles Hotel at $100 million, that's close to a million a room.' But analysts say the hotel could be valued at $200-$300 million.

UOB Kay-Hian analyst Pratik Burman Ray said in a note yesterday: 'Our previous RNAV estimate of $2.35 for CapitaLand was based on the market of 68 cents for Raffles Holdings. With the present deal putting the value of Raffles Holdings close to 86.2 cents per share, we are revising our RNAV upwards to $2.43 per share (upward revision of 3.4 per cent).'

Raffles Holdings' shares closed at 68 cents and CapitaLand at $2.39 on Friday last week and were suspended from trading yesterday pending the announcement. They will resume trading today.

Colony said it plans to maintain all operations under the current brands and will look for opportunities to grow the franchise, especially in Asia.

'We are honoured to become the custodian of one of the finest hotel chains in the world and a true national treasure of the people of Singapore,' Thomas J Barrack, chairman and chief executive of Colony Capital, said in a statement. 'We deeply respect the historical significance of the Raffles Hotel, Singapore and we consider it our responsibility to protect that legacy. We are delighted Jennie Chua has agreed to remain as chairman of the Raffles Hotel Singapore to provide continuity and support our efforts,' he said.

Ms Chua said about 30 to 40 staff will remain at Raffles Holdings and a committee will be formed to consider what to do with the proceeds and where to take the company.

'We have a lot of ideas what to do, including going into the mixed-use development, and other ideas which, right now, is prudent for us not to mention until we are ready,' she said. 'We will go to the board for approval after we have a business plan. Fundamentally, anything that will make money, gives us the correct yield and within our area of expertise and management capability.'

As for CapitaLand, it will use the proceeds for retail developments and other projects, Mr Liew said. He denied speculation that Ascott Group, its serviced-apartment business might be up for sale as well.

'Ascott today, outside the USA, is number one in the world. So I am already in pole position. It is much easier for me to develop it,' he said. 'We're already there, it's a matter of growing it. For Raffles to be in the top ten, it's a lot of core capital, it's a lot of competition. So why should I divest Ascott? And Ascott's call for capital is much lower than the hotel business. Hotels are expensive.'

Another analyst said the deal was a fair one for Raffles because it could be 'as good as it gets'. 'It's very difficult for them to build the brand,' he said.

'It'll take another 10, 20 years before it becomes a Marriott or a Four Seasons, and it's a painstaking task. Once you unlock the share value, and this deal is good in that sense, that you call it a day.'

CSFB is adviser to the Raffles-Colony deal. - by Jean Chua   BUSINESS TIMES   19 July 2005

Raffles Holdings Limited announced that it has entered into a definitive agreement to divest its Hotel Business to Colony HR Acquisitions LLC, an affiliate of Colony Capital LLC for an enterprise value of US$1 billion, subject to adjustments upon completion. Raffles Holdings is selling its entire hotel business of 41 properties, including Singapore's 118-year-old Raffles Hotel, for US$859 million cash to Colony Capital, retaining only its interest in the multi-use Raffles City complex. Under the deal, Los Angeles-based Colony Capital will pay a 64 per cent premium above the hotel business' net tangible assets, and Raffles Holdings will net a gain of US$352 million and keep its 45 per cent share in Tincel Properties, which has a US$407 million stake in Raffles City. The complex houses Swissotel and Stamford hotels, Raffles City Shopping Centre, Tower Blocks and Convention Centre.

More to RHL-Colony deal than meets the eye

Even as the dust settles on the mega-divestment of all the hotels business of Raffles Holdings Ltd and as shareholders pat RHL's management on the back for a job well done, it's worth pondering the flip side of the coin: why did US-based Colony Capital pay such a huge premium in the first place?

Stated differently, is there more to the deal than meets the eye? More than a simple sale of hotel assets by one operator to another?

On Monday, RHL surprised the market with news that it is to sell all its hotels including the iconic Raffles Hotel at Beach Road for $1.72 billion in cash and debt to Colony - a price tag that represents a 64 per cent premium to net tangible assets.

High premium

Now, consider that most of the time, hotel and property stocks trade either at or below their net asset value. For most such counters, the debate among analysts is usually what a reasonable discount could be, given that the assets in question are usually illiquid and disposal is typically difficult.

Of course, this is the Raffles we're talking about - one of the best hotels in the world, and a brand name that arguably commands a premium. And you might also argue that in order to get full control of all of RHL's assets that took years to build up, some sort of premium can be expected. But 64 per cent?

Colony is no stranger to the hotels business. The US-based company is essentially a private property investment firm that started out in 1991 with US$1.25 billion in investors' cash. According to a press report on its website, it has since raised US$4.5 billion to buy hotels, casinos and movie theatres.

Last year, Colony spent US$1.24 billion buying casinos in Chicago and Atlantic City. In December, it took a 15 per cent stake in a European consortium which, according to the accompanying press statement, is a 'major casino operator that aims to be a European leader'.

In a magazine interview, Colony's chief executive recently outlined a strategy that involves a major push into the gaming industry to capitalise on the pressures within the industry for players to consolidate.

Interestingly, a Sept 1, 2004 article in the Los Angeles Times describes the company as having a good track record in buying assets, 'then ditching them at a profit'. The article also says: 'That's Colony's business: scouring for undervalued or distressed properties that it can overhaul and eventually resell to earn the 20 per cent-plus annual returns its investors have come to expect.'

Still, it's unlikely that turning a quick profit is the intention with the RHL deal, given the size of the premium paid and the fact that RHL was far from a distressed asset. However, it is worth bearing in mind Colony's track record of owning hotels and casinos, and, if the US press is to be believed, its penchant for selling out as soon as possible.

More likely in the case of RHL is the possibility that Colony has forked out a substantial sum to gain a foothold in the local casino scene, which is expected to take off before the end of this decade.

Handy cash hoard

Will Colony or its new vehicle RHL join hands with RHL's parent CapitaLand in the race to build Singapore's first integrated resorts (IR) with casinos? CapitaLand has teamed up with two strong contenders - MGM Mirage and Kezner International - to bid for the two IR sites separately.

The iconic Raffles brand and RHL's post-divestment, post-dividend cash hoard of $600-odd million will definitely come in handy for any casino foray.

One thing's for sure: there's more to the RHL-Colony deal than meets the eye. There will surely be more deals - probably casino related - to look forward to. - by R. Sivanithy   BUSINESS TIMES   20 July 2005

A great lesson in unlocking hidden value

Although  there may be initial disappointment over news that a national landmark like the Raffles Hotel is to be sold to an American party, it has to be said that if there was any 'correct' way to unlock value in parent Raffles Holdings Ltd (RHL), yesterday's announcement of a divestment of all its hotel interests totalling $1.7 billion is as good as it gets.

To be sure, the sale isn't totally unexpected. In fact, management had in its latest annual report said it intended to pursue an 'asset-light' growth strategy - surely a hint at what it had in mind.

Furthermore, the hotels business has always been notoriously difficult, requiring large capital outlays in return for largely uncertain revenue streams that are vulnerable to small changes in economic well-being and to unpredictable events like terror attacks and natural disasters such as last December's devastating tsunami.

It is therefore not surprising that investors generally tend not to be inspired by hotel stocks. The Straits Times Index, for example, which bases membership largely on liquidity and hence market interest, many years ago included several hotel components but now does not contain a single one.

This loss of interest in the sector has been evident in RHL's generally lacklustre stock price performance since it listed in December 1999 at 85 cents per share. Although the company last year undertook a capital distribution and capital reduction worth 18 cents per share, it would be fair to say that if there had not been intense speculation about the possibility of a casino deal - which benefited all property and hotel-related counters during the first few months of this year - RHL's shares would still be stuck somewhere in the region of 40-50 cents.

All of which is a roundabout way of saying that for years, RHL was viewed by the market as being rather boring - a well-run company in a competitive business whose shares were not going to collapse but, by the same token, wouldn't get the pulses racing.

Not any more though. If the sale to US-based Colony Capital goes through as planned, there are exciting times ahead not just for its shareholders but also those of parent CapitaLand. When RHL shares resume trading - probably today - the price should reflect optimism about the deal, though how much higher they might trade is difficult to gauge.

One way of obtaining a ballpark fair value is to add the 69 cents per share in cash the company is getting for its hotel operations to the proportionate book value of its 45 per cent stake in Raffles City, the latter being RHL's only remaining asset.

This is the approach taken by local broker UOB-Kay Hian, which arrived at a figure of around 86 cents per share. Since this is about 26 per cent higher than the pre-suspension price of 68 cents, shareholders have an immediate windfall to look forward to, if they decide to sell.

Similarly, CapitaLand shareholders have also something to smile about via their 60 per cent stake in RHL. Apart from the upward boost to net asset value and earnings, the dividend that RHL is paying works out to about 18 cents per CapitaLand share.

The company hasn't yet said if it intends to distribute all the cash it is to get from RHL, but chances are that some portion will find its way into the pockets of CapitaLand shareholders.

Finally, the question of what lies ahead. Apart from a 45 per cent share of Raffles City, RHL will be sitting on a nice, post-dividend cash hoard in the region of $600 million for use in ways that it deems fit. A special committee has been appointed to evaluate investment options, and already there is speculation about where a casino might fit in.

We don't know what the future might hold for RHL but we do know that if any other company wishes to unlock hidden value that may not be fully reflected in its share price, it can't go far wrong if it follows the RHL approach.  - by R. Sivanithy   BUSINESS TIMES   19 July 2005

Can a Singapore icon be owned by foreigners? Jennie Chua, Raffles Holdings CEO believes so. 'Customers, guests don't care who the owners are,' she said yesterday. 'And the staff, who will continue to work under the same management, are also equally comfortable. The fact is that it will always be a Singapore icon because it's here and because it will be managed by the people who are here.'

The Raffles Hotel will be sold to Colony Capital for US$1 billion as part of a package of 15 Raffles properties and 26 Swissotel hotels and resorts. Some members of the community will decry the loss of a national monument, but in fact the US-based company will just be the latest in a long list of owners of one of the world's best known hotels.

In 1887, the Armenian Sarkies Brothers, who were the proprietors of another fabled hotel - the Eastern & Oriental - in Penang, decided to open a hotel in Singapore. The location was a 10-room old bungalow owned by Arab businessman Mohamed Alsagoff.

The hotel quickly expanded. And even after the Sarkies Brothers lost control of it during the Great Depression of the 1930s, the Raffles Hotel managed to survive by going public. The land, however, still belonged to Alsagoff family.

Leslie Danker, Raffles Hotel guest relations manager and an employee since the 1970s, recalls that Mohamed Alsagoff inserted a proviso in his will that stipulated the land could not be sold until his last male heir died. This happened in the early 1960s, and the land was sold to Malayan Banking, founded by Khoo Teck Puat. By this time, the management of the hotel had fallen into the hands of OCBC Bank. Mr Danker also remembers that Tan Chin Tuan, then OCBC's managing director then, managed to persuade the board of directors that there was a conflict of interest because Malayan Banking also owned the Goodwood Park Hotel, and Malayan Banking later bowed out, selling its stake to DBS Bank.

The owners may have changed, but as a piece of real estate the Raffles Hotel is safe. 'You can't dig it up and plant it elsewhere,' says Ms Chua. Apart from her assurances, the hotel is also protected by the Preservations of Monuments Act. In 1987, when the future of the hotel was in the balance, the Raffles was gazetted for conservation. In 1995, when restoration and extension work was completed, it was designated a national monument.

The Preservation of Monuments Board (PMB), a statutory board of the Ministry of Information, Communications and the Arts, has strict rules on preserved buildings. On the Raffles, a PMB spokesperson said: 'Its building should be preserved according to the regulations safeguarding a national monument whether the hotel is owned by local companies, government-linked companies or foreign companies. This includes the retention of the name of the building. The name of the hotel should be retained as Raffles Hotel because it is a part of Singapore's history and heritage.'

And the Raffles Hotel is not the first national monument to be owned by a foreign company either. Just this June, the old Thong Chai Medical Hall was sold to another US-based company for around $7 million.

CapitaLand CEO Liew Mun Leong notes that some of the world's best-known architectural icons like Harrods in London and the Rockefeller Center in New York are foreign-owned. 'And who knew that the Plaza Hotel in New York was owned by Singapore's Kwek Leng Beng?'

CapitaLand is the parent company of Raffles Holdings. Mr Liew says he 'supports the transaction', adding: 'We cannot make an investment or divestment based on an emotional business.' He also reveals that since the hotel fell into the hands of the group in 2000, there has always been talk of divestment. 'If we are emotional, we cannot be a developer,' he adds. - by Arthur Sim & Wee Li-En    BUSINESS TIMES     19 July 2005