• MWB’s tricky sell-off

Marylebone Warwick Balfour’s plans to sell its portfolio of hotel assets after the failed float of Vector, the UK’s first dedicated hotel REIT, has put the company’s CEO in a bind.

A successful sale much in excess of the £495m that Vector agreed to pay will reinforce arguments made by MWB’s largest shareholder that the initial deal had not been in shareholders’ interests.

Richard Balfour-Lynn, MWB’s chief executive, has reacted angrily to allegations by Mercury Real Estate Advisors, a US hedge fund, that the deal with Vector showed a “lack of transparency and poor corporate governance practices”.

Balfour-Lynn said: “I cannot stress enough how appalled I am at Mercury’s behaviour which is not what one expects from an institutional shareholder.”

The hard hitting Mercury letter, addressed to MWB’s directors and released on a newswire, described the op-co / prop-co structure to enable to sale to Vector as “designed solely for the benefit of Balfour-Lynn”.

Mercury holds 15.8% of MWB and in the letter claimed it was a strong supporter of the company. But it said it had voted in favour of the off-market sale of MWB’s hotel property “very reluctantly”, arguing that it had been presented to shareholders as a “fait accompli”.

The subsequent failure of the flotation of Vector was “substantially based on the market’s negative view of its undesirably conflicted and externally advised corporate structure rather than a reflection of the underlying markets or initial portfolio”.

The comments and tone of the letter caused Balfour-Lynn, in the press release this week announcing the formal sale of MWB’s hotels, to be equally hostile. He described the remarks about the process relating to the proposed sale to Vector as being “wholly unfounded” and “wholly unwarranted”. It was even stated that “the board could instigate proceedings againstMercury” but “it does not feel this would be the best use of either management time or shareholders’ funds”.

The sale process of the assets was, according to Balfour-Lynn, “well underway before we received the Mercury letter”.

The problem for Balfour-Lynn remains, however, that if Bank of America, which has been mandated for the sale of the 17 Malmaison and Hotel du Vin properties, finds buyers prepared to pay substantially more than Vector had agreed, then Mercury is going to look like it is right.

The paradox is that if this is the case, then investors should have been prepared to snap-up the Vector shares, as the company was making a shrewd purchase.

In reality, it seems unlikely that Vector, which was to have gearing at under 40%, could afford to pay the premiums private equity might stretch to given that debt is available in excess of 85% for such unlisted buyers.

Balfour-Lynn had put himself in a position where it was impossible to keep everybody happy: either MWB shareholders were going to be upset or the would-be investors in Vector. Unfortunately for him, he is receiving a kicking from all parties.

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