• Jarvis Hotels typifies mid-market malaise

While RBS was successfully selling the Grosvenor House Hotel in London, rumours started to flutter around that it was considering taking control of Jarvis Hotels.

The disposal of the iconic London luxury hotel, although subject to a lengthy sales process, was in contrast to activity in the UK's mid-market hotels sector, which has suffered from poor trading as a result of exposure to the provincial market and competition from the branded budget sector below and discounted hotels above.

 

This pressure on the mid-market was further illustrated last week by the release of a study by Trowers & Hamlins, which reported that a key trend of the current ‘age of austerity' had been consumers increasingly looking for quality over quantity when spending on travel and leisure by ‘bunching' their spend on fewer, but better experiences.

According to the report, owners and operators should invest now to improve their offering or risk being squeezed out of the market. It warned that, "potentially the most dangerous

place to be in this situation is at the fringes of luxury, where middle-ground offerings will

face being left behind by the luxury-leaders and so relegated to the mid-market".

The 40-strong Jarvis Hotels, slap-bang in the mid-market, was taken private in 2003 in a £229m deal and is reported to have breached its banking covenants several years ago. It is also thought to have been most-recently valued at less than its £130m debt.

RBS is the main lender to the company alongside HSBC and Bank of Ireland and the banks are understood to be looking at a financial restructuring under which they would take control, following earlier failed efforts to sell the group for an acceptable price. Akkeron Hotels – which acquired Forestdale Hotels at the end of last year – and Benson Elliott Capital Management had been tipped as buyers, but it is thought that concerns over Jarvis's £17m pensions liabilities were a deterrent.

A debt-for-equity swap or putting the group into administration are seen as the most likely options, but RBS is thought not to have decided on a favoured course of action.

For Akkeron, the Forestdale deal would appear a less complex proposition than taking on Jarvis. The transaction to acquire the 18 hotels from private owner Robin Collins increased Akkeron's estate to 26 and made it one of the largest regional hotel operators in the UK by number of hotels.

The acquisition was funded with a mixture of equity, deferred consideration and a new £32m 18-year credit facility provided by Lloyds Banking Group. James Brent, chairman of Akkeron, said that the whilst the trading outlook for regional hotel operators in the UK remained challenging, the group continued to see "exciting opportunities to acquire high quality hotel assets that will benefit from capital investment and the operational expertise that an operator of scale can provide".

Akkeron expects to announce further acquisitions this year and, although STR Global forecasts an, albeit moderate, 4.4% increase in revpar in the provinces, it is still likely to find many opportunities to buy in the sector.

The Trowers & Hamlins report does give some hope to the mid-market, suggesting that the effect on the hotel industry of economic recovery could be that UK domestic consumers could abandon the luxury domestic market to return to mid-market foreign travel, to be replaced by a resurgence of foreign travellers coming to Britain.

The study concluded that this could be coupled with a move by luxury brands from

'attainable' into 'affordable luxury', which in turn could lead to a revitalised mid-market. Akkeron, with its refurbishment plans, would be well-placed to compete with such a development. The future for Jarvis looks more uncertain.

 

HA Perspective: Midmarket malaise is not exclusive to Britain. The situation is arguably even more serious in other countries, particularly if they have not benefited from a currency devaluation as in Britain which has made the UK 25% or so cheaper for foreign tourists paying in Euros.

NH Hoteles announced at the end of 2010 that it had obtained a covenant waiver for the year concerning a Eu650m loan signed in August 2007 of which Eu617.5m is still outstanding.

This waiver relates to net debt / EBITDA and EBITDA / net financial expenses, giving until the end of this year for compliance (or another waiver).

The current cost of financing, EURIBOR plus 120 basis points, is going up by 50 bp plus an upfront waiver fee of 50 bp.

Such margin enhancements are likely to be standard practice among banks as they seek to restructure what were effectively loss making lending positions established in the go-go period of 2005 to 2007.

The result of increased margins is, of course, further stress on the borrowers. If this is to be compounded with base rate increases, then a large number of hotel businesses are likely to fall over.

Added to all this cyclical woe is the shift in customer sentiment away from the mid-market towards either budget austerity or luxury splurge. How profound this structural shift proves remains to be seen but the changes in the airline industry, which has a similar customer profile to chain hotels, look pretty permanent.

It seems pretty clear where the hotel sector casualties are likely to be over the next few years.

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