• Fattal files for IPO

Fattal Hotel Management is to offer 10% of its shares on the Tel Aviv Stock Exchange, potentially valuing it at up to USD1bn.

The company said that it would use the proceeds to cut debt in addition to fuelling future development, with further growth in Europe likely after last year’s deal alongside Pandox in the UK.

The group is 72% owned by founder David Fattal, 9.5% by his former wife Hadassah Fattal and the remainder by Migdal Insurance and Financial Holdings. As well as the IPO, the group is making a NIS100m Series A bond offering.

Fattal Hotel Management currently has 167 hotels with 32,000 rooms in 17 countries. Of Fattal’s 39 hotels in Israel, 21 are owned by the group, 11 are rented, and seven are managed by the chain under the Leonardo, U, Herods, NYX, and Rothschild 22 brand names.

In Europe it has 128 hotels: 48 fully or partly owned, 76 rented, and four managed. The chain’s largest concentration of hotels, 59, is in Germany.

The company has been benefitting from growth in its domestic market. During the first six months of 2017, over 1.7 million tourists entered Israel, up 26% from the first half of last year, according to the country’s Central Bureau of Statistics, with hotel occupancy reaching 73.4% in Tel Aviv (vs. 68.9% in the first half of 2016). Tel Aviv in particular has been singled out by both domestic and international operators, having evolved into a tech hub.

Fattal reported a 30% increase in revenue on the year for the first nine months of 2017 with net profit up 19% and Ebitda rising by 18% for the same period.

The end of last year saw Fattal participate in Pandox’s GBP800m deal with Lone Star to acquire 37 hotels in the UK, 35 of which were under the Jury’s Inn brand.

Pandox financed the deal with bank loans and a GBP120m loan from Fattal, to be off-set after a reorganisation, after which Pandox will retain 20 investment properties and one operating property in the UK and Ireland and Fattal will take over the leases on the remaining 15 properties. The sites which will be managed by Leonardo Hotels Europe, a subsidiary of Fattal, under long-term revenue-based leases.

Leonardo will operate all 35 Jury’s Inn branded hotels in the UK, Ireland and the management contract for Jurys Inn Prague. Pandox CEO Anders Nissen told us that the decision whether or not to keep the Jury’s Inn flag lay with Leonardo.

Commenting on the IPO, Russell Kett, chairman, HVS, told Hotel Analyst: “Like any hotel valuation, the pricing is based on an estimate of the future earnings (net income after expenses) which can be expected to be generated by the business, to which an appropriate discount factor (yield) is then applied.  In the case of Fattal, the income is derived form a number of sources – wholly-owned hotels, leased hotels, management contracts – and in a number of geographies.

“Fattal originally built up a significant critical mass of hotel operations in Israel, its home turf; the company has done well to establish itself as a major hotel operator in Germany and, with the advent of the Jury’s deal with Pandox, now also in the UK.  Achieving critical mass for a mid-market operator is critical to driving profitability, for which Fattal has established a strong reputation.  The company also has diversified itself from being a pure Israeli hotel company to being one where its income base is more widely spread over different geographies and different economies.  At this time, the economies of Israel, Germany and the UK are strong which is a further boost to the company’s earnings.

“An IPO in Israel allows Israeli investors the benefit of diversifying their own investment income, benefiting from earnings generated both within and outside Israel.  The funds released to Fattal through this IPO should enable the company to further diversify its interests to other European countries where its goal ought to be to seek out opportunities for improving its hotels’ bottom line earnings through economies of scale and increasing its top line through greater brand recognition.  This may lead the company to acquire single assets but, given its established operating models, the potential of acquiring portfolios either alone or as joint-ventures should not be ruled out.”

HA Perspective [by Katherine Doggrell]: The split between brains, bricks and brawn is something which keeps us limitlessly fascinated here at Hotel Analyst and the sector has largely been moving in one direction since it first occurred to one hotel owner that having all that real estate sitting on the street and not in their bank account could easily be rectified. Now, unless you’re Marriott International, which enjoys a strategic purchase, the global operators are just that – operators.

What motivated this shift in large part was that the markets did not know how to price assets plus brands (or not to the tastes of the owners). The way the wind has blown has meant that there are very few owner operators left in the public domain and recent failed efforts by CDL at Millennium & Copthorne have illustrated that some would rather act in the shadows.

Fattal is a complex beast. Opportunistic and inventive, it has worked twice alongside that most enthusiastic owner operator, Pandox and may well do again. As Kett illustrates, it’s not that hard for potential shareholders to work out the upside. Having more than one string to your bow is generally regarded as a good thing, promoting a nimble nature.

But is the tide turning for ownership? At its 2018 Investors Day last month Federico González, president & CEO, The Rezidor Hotel Group, told the gathering about “a renewed asset-right growth strategy”, which will see Rezidor focus on entering new lease agreements in mature markets.

Whether the story behind this is competition for sites – as has been seen in markets such as Spain, where travel agents have move into ownership – or an increased understanding of the market’s complexities by investors, Fattal is likely be raising cash at the right time.

Additional comment [by Andrew Sangster]: The pricing of the IPO took a 15% haircut today ahead of the official listing next Monday. This means the listing is likely to raise just less than USD100m and values the company at USD1bn.

In global terms, this is not a particularly significant event. The most interesting aspect is that it provides a little more transparency on that increasingly rare beast: a listed owner-operator.

With just 10% free float, it will remain a tightly held company in the firm grip of its founder, David Fattal. This is not a bad thing if you accept that proposition but minority shareholders should be under no illusion as to their power.

Also, it seems unlikely that the IPO will herald a change in direction for other, bigger hotel groups. Asset light is still going to be the preferred option for all the global majors. The final hold-out, Hyatt, last year joined the ranks, hoisting the for sale sign on much of its owned real estate.

Will there, however, be a renaissance for the mid-sized chains? Are these groups likely to return to public listings? Again, probably not. Stock markets have not proved happy homes to integrated owner operators. For all the talk about the PE platforms hoovered up in the past decade exiting via a listing, not one has chosen this as a route. Lone Star’s disposal reported elsewhere this week is the latest example of private equity selling to private equity.

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