Fairmont Hotels & Resorts, the listed Canadian group, is to be bought by Kingdom Hotels International and Colony Capital via a merger with Raffles.
The move sends three clear signals to the market: activist hedge funds such as Carl Icahn's cannot be ignored; the market for hotel real estate has become exceptionally frothy; and Islamic capital is a force to be reckoned with.
Prince Alwaleed's Kingdom Hotels International is taking a two-thirds stake in the newly formed combination of Fairmont and Raffles. The total deal has a headline value of $5.5bn.
A newly formed Canadian company is to acquire Fairmont and be merged with Raffles, which was taken private by Colony last summer. The new group will comprise 120 hotels in 24 countries. The intention is to keep the two brands separate and both headquarters, in Canada and Singapore respectively, will be maintained.
Given that the deal is heralded as creating a global luxury chain, the retention of two brands and two headquarters does not look like a long-term situation.
Fairmont is the brand favoured to bite the dust and be folded into Raffles but given the longevity of the Swissotel brand under Raffles this could take a while.
Fairmont derived 76% of its 2004 EBITDA from hotel ownership. Icahn had been pressing hard for it to divest this real estate to realise value. Rather than capitulate to a bid from Icahn at around $40, Fairmont has accepted a $45 bid from Kingdom / Colony.
The deal is due to go to a shareholder vote in April and is expected to complete shortly after. There is a break fee of $115m.
The close to 10% shareholding in Fairmont that Icahn had built up will net a handsome profit which he can add to his existing pile worth an estimated $8.5bn.
Icahn has rebranded himself as a hip hedge fund, dumping his previous persona of corporate raider. Icahn & Company was established less than two years ago and has around $1.6bn under management. As well as torturing Fairmont he has been active with Time Warner and Blockbuster.
Icahn will be pleased with the price he has squeezed for Fairmont. It represents around 18.5 times 2006 EBITDA estimates, according to Citigroup. This compares to the average 11.2 times for Orient Express, Hilton Hotels Corp and Starwood.
The share price being paid is a 28% premium over the closing share price the last trading day before Icahn revealed his interests in Fairmont in early November. It is not expected that Icahn will launch a counter offer.
For Prince Alwaleed, the deal cements his position as a titan of the global hospitality business. With stakes in the operating companies of both Four Seasons and Moevenpick plus substantial interests in many of the properties within these two groups, and a stake in the newly listed Dubai-based IFA Hotels & Resorts, much of his $24bn or so fortune is now connected to hotels.