Posted on February 14, 2014

In one of the biggest deals in the Indian hospitality industry, sovereign wealth funds of Abu Dhabi, Qatar and Malaysia are vying with each other to acquire two of India's marquee properties for about US$322 million, said a news report.

All the three funds are big time investors in leisure and tourism assets. Abu Dhabi Investment Authority, the world's third biggest sovereign fund with US$627 billion of assets, recently bought Australia's largest owner of hotels, Tourism Asset Holdings.

Similarly, Qatar Investment Authority, which owns luxury department store Harrods, plans to expand the brand into hotels. And Khazanah Nasional owns themed resorts in Malaysia. Backed by their cash-rich governments, the funds are in discussions to pick up 74 per cent stake in Leela Group's Delhi and Chennai hotels for over Rs 2,000 crore (US$322 million), the Times of India reported.

The deal, if it goes through, will also mark the entry of sovereign fund investment in the sector, it said. The Leela chain, in which ITC Hotels holds a 12 per cent stake, has been in the red for the past several quarters, hit by business slump, competition and demand-supply mismatch.

As part of its restructuring, the group had decided to hive off the two properties into separate entities, with Leela retaining 26 per cent stake and continuing to manage the five-star hotels, said the report. The Leela Group is ceding majority ownership in its Chennai and New Delhi hotels to pare liabilities after moving the corporate debt restructuring (CDR) cell.

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The transaction, managed by IDBI Capital and State Bank of India (SBI), is expected to be completed in the next few weeks. SBI is the lead banker for the group's CDR processes -- a mechanism where borrowers seek extension of loan period and adjustment of interest rate.

Leela Group chairman and managing director Vivek Nair confirmed the stake-divesture discussions, saying it is being done to lower the debt level from the current over Rs 4,000 crore (US$644 million), said the English daily.

Unlike an outright sale, as was done in the Kovalam hotel's case, this time the group prefers to retain some ownership. The move is also in line with the broader industry trend where hotel ownership is separated from hotel management, it said. Leela Delhi is a 260-room property for which the group acquired land for nearly Rs 600 crore when the government auctioned it in the run-up to the 2010 Commonwealth Games.

Located in the diplomatic enclave at Chanakyapuri, it is the Capital's first freehold property. Leela Chennai is a 326-room key property on the sea face in Chennai's MRC Nagar. The contours of the transaction envisage Leela managing the properties for 33 years for a fee. "The negotiations are veering towards a 7.5 per cent management fee on gross operating profits," industry sources said.

The Leela Group reported a loss of Rs 433 crore on revenues of Rs 653 crore in fiscal 2013. It has been monetising its assets to script a turnaround. It sold its Kovalam beach hotel in Kerala for Rs 500 crore in 2011 and its Chennai business park for Rs 172 crore in 2012.

The group, which started as a lace-maker in the mid-1950s, ventured into the hospitality sector in the 1980s with a single property in Mumbai. Today, it manages several hotels in the country's business and leisure destinations.

source: Bernama