• Forte taps Italian state aid to grow his group

Rocco Forte has agreed a funding deal with new Italian backers, that will help drive growth in the RF hotels brand, potentially doubling the portfolio over the next five years.

The GBP60m equity injection from Italian state-backed sovereign fund Fondo Strategico Italiano is in return for a 23% stake, valuing the RF Hotels business at GBP260m. The fund is 80% controlled by Cassa Depositi e Prestiti and 20% by Bank of Italy; and the Kuwait Investment Authority also has a minority stake in the investing vehicle.

In addition to the cash injection, CDP is said to be looking to establish a fund that will purchase hotel properties, which will then be leased to Rocco Forte Hotels.

Forte has revealed he is “already at an advanced stake of discussion” over a development in Venice, as well as projects in Milan, Naples and Sicily. He also says he is exploring opportunities for hotels in New York, Paris and Madrid.

Forte told the Financial Times that Italy would be a new area of focus. “I understand Italy. It’s a difficult place, but as a tourism industry it has a lot of potential,” he said. “Room rates are high and occupancy is good. And of course I have my Italian origins.”

“Now we are in a position to start moving forward. I have a much bigger capital base and can raise new debt as and when I need to. Most of our developments will be through management contracts and leases.”

Maurizio Tamagnini, CEO of the FSI, painted the investment as one supporting the development of the Italian tourism industry. “The partnership with the Rocco Forte Hotels group is the first concrete step in the development of the Italian tourism industry by FSI.”

The talk of additions is in distinct contrast to the group’s recent reduction in size, with disposals bringing it down to a core of ten hotels. In 2010, the company sold out of its Le Richemond hotel in Geneva. It gave up a property in Prague, after the landlord grew tired of rent concessions; and quit the management of a new property in Abu Dhabi, now running instead as a Hilton.

Earlier this year, it sold the Lowry hotel in Manchester to Westmont and Mount Kellett, arguing that Manchester was not a gateway city with the class required of a Rocco Forte location. The group is scheduled to open a new hotel in Jeddah next year.

The group still has substantial debts. According to the Financial Times, the group’s net debt stands at GBP105m, while there is GBP85m of net debt against the group’s Sicily property.

The attraction of Italy to Forte is evident from a reported financial breakdown of the group’s activities. Of the EUR181m turnover of the group in 2013-14, 32% came from the Italian properties in the portfolio; these represented 34% of ebitda. The UK Rocco Forte hotels accounted for 24% of turnover, yet delivered 39% of ebitda over the same period.

News of what is effectively a state agency, providing backing to a UK company, has not been universally well received in Italy. Local critics suggest the investment is a poorly thought through attempt to revitalise the Italian hospitality sector, and will serve only to bring publicly owned buildings back into use, at a cost to the public purse.

There are reports that the Italian state authorities have set aside a fund of up to EUR500m to invest in similar ways, to promote the Italian tourism industry.

Forte has some competition in his chosen sector. Consultants Horwarth HTL say the luxury and upscale sectors in Italy have seen a 24% increase in hotel numbers over the last five years, while there has been a substantial decline at the lower end of the market. And these are the segments of the market taking the interest of international brands.

Among those opening rival luxury hotels in Italy without state support is Millennium & Copthorne, which has completed its recent acquisition of the Boscolo Palace Roma hotel. Now rebranded as the Grand Hotel Palace Rome, M&C’s first property in Italy has 87 luxury suites. In July, Spanish group NH unveiled the NH Collection Palazzo Barocci, a 59 room boutique hotel in Venice that is the first of several upper upscale hotels promised for the Italian market. And Melia is to open its first ME branded hotel in Milan during 2015.

Meanwhile, the Italian hotel sector has yet to enjoy the upturn being experienced in southern European neighbour Spain. This year has seen poor visitor numbers, not helped by bad weather which led some hoteliers to offer a rainy day rebate to visitors. And OTA Trivago reported November rates down 44% on October’s prices in Venice, while they were down 32% in Rome and Florence.

 

HA Perspective [by Chris Bown]: A few months ago, when Rocco Forte put the Manchester Lowry on the market, there was a clear strategic reasoning given. Manchester – in contrast with the other RF hotel locations – was not a gateway city, and therefore had no place in the portfolio. New openings would be in high calibre, international cities.

Thanks, perhaps, to the group’s new paymasters, there appears to have been a change of direction. Naples and Sicily rank no higher than Manchester on the gateway destinations list, but appear to be likely new locations for Rocco Forte hotels. Some commentators have suggested the new investment may be used to acquire a group such Boscolo, which has seven luxury hotels, of which four are in Rome, Milan and Venice.

Back in July, the Italian press was flagging up the pending deal, also noting that Rocco Forte’s group had previously enjoyed the benefit of Italian government grants. Italian newspaper Dagospia suggests the finance deal may be linked to the Rocco Forte resort there, and complications to do with an adjacent residential development, that has not yet happened. Coincidentally, there have also been complaints regarding state support for a separate development on Sicily, a rather large 420-room hotel recently announced as the Hilton Catania.

Some have suggested Forte’s new strategy appears to be predicated on taking some grand old Italian buildings, which the state will refurbish, only for a foreign owned company to draw profit from. Those critical of the deal have also suggested some more constructive ways to develop the Italian hotel market, such as encouraging the separation of ownership and management, and providing tax breaks to encourage development – but letting private companies finance such developments themselves.

All-in-all, the deal appears to serve to reinforce Italy’s reputation as a tricky place to do business, and one where state support can come in unexpected ways. Quite why the fund is backing an entrant into the busiest part of its market, with the most competition from strong international brands, is unfathomable. It won’t move the needle as far as tourism numbers are concerned. Forte’s Italian diversion will also serve to inform landlords of luxury hotel projects in gateway cities, when they consider whether to put Rocco Forte Hotels on their brand shortlist.

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