• Raffles is the prize

The proposed sale of the iconic Raffles Hotel in Singapore is being portrayed as an attempt by Prince Alwaleed to shore up his finances.

But while his stake in Citigroup, formerly a key pillar of his wealth, has shrivelled the move is consistent with the long-term objectives of Fairmont Raffles to unload its real estate.

The surprise, however, is the timing of the disposal. And this may indicate that Fairmont Raffles is in need of the cash infusion that the London Times suggests it is seeking. Or it might just show that the group has acknowledged that prices for hotel property have dropped and are likely to remain down for the near term.

Fairmont Raffles was formed in early 2006 in a merger that had a headline value of US$5.5bn. Alwaleed's Kingdom was left with a two-thirds stake in the combined operation and the remainder with Colony Capital. Colony had taken Raffles Holding private a year earlier.

[The Raffles deal was struck with Kingdom Hotels International and Colony. KHI is owned by Kingdom Trust, which was established for the benefit of Prince Alwaleed and family. It is separate to the Dubai-listed Kingdom Hotel Investments headed by Sarmad Zok. Kingdom Trust is also the owner of the majority shareholder in Kingdom Hotel Investments. Just to confuse matters, Kingdom Hotel Investments, does have a small (less than 1%) stake in Raffles Fairmont.]

The Fairmont and Raffles merger was struck at a heady multiple of around 18 times EBITDA. It played on the arbitrage between the valuation of property on the stock market and the prices then being fetched for assets sold directly.

The depressed share prices of hotel companies means that a similar sized arbitrage still exists but the prices likely to be realised for the assets in 2009 are well below the peak levels back in 2006 and 2007.

And this means that the windfall that looked likely three years ago is not going to appear. As ever with hotel property deals, the timing of the cycle is critical.

Last month (March), Kingdom Hotel Investments CEO Sarmad Zok said in the group's annual results that cash preservation and prudent balance sheet management was his focus.

"Given the dislocation in capital markets and global liquidity issues, we expect the current standstill in real estate transactions to continue. KHI does not foresee any resumption of its acquisition activities until the second half of the year at the earliest and will continue to take advantage of portfolio rationalisation opportunities," added Zok in a statement.

The cash preservation will see KHI shed 17 of its 65 HQ staff during this year. The company suspended revpar guidance until visibility improves.

Share →