Podcast | Editor's pick of the day - Is the legacy of brand Leela in good hands?

On March 19, 2019, businesstoday.in reported that shares of Hotel Leela Venture hit the 5 per cent upper circuit in late morning deals after its board approved the sale of four hotels, including one in Delhi, and a property to Canadian investment fund Brookfield Asset Management for Rs 3,950 crore.

The company entered into a binding agreement with a Brookfield Asset Management-sponsored private real estate fund to sell, by way of slump sale, four owned Leela hotels located at Bangalore, Chennai, Delhi and Udaipur and the property that it owns in Agra.

As reported by various media outlets, the transaction includes assignment of all hotel management contracts currently in operation as well as all under-development, along with the employees of the hotels. The total transaction value is Rs 3,950 crore plus the applicable transaction costs. After completion of the aforesaid transaction, all borrowings of the company from all banks and financial institutions would stand repaid.

Brookfield will have a right of first refusal over the company's hotel in Mumbai, as a part of the transaction.

The piece cites Hotel Leela Venture Chairman and MD Vivek Nair who said: "The Leela is rated amongst the top hospitality brands in the world and I am confident that the brand will receive a boost and be further strengthened and continue to be known for its world-class services". Unquote.

The article also cited Brookfield Asset Management MD and Head-India Real Estate Ankur Gupta who said, "We are excited with this opportunity and look forward to completing this transaction at the earliest while ensuring that all operations remain unaffected. We expect the Leela hotels to continue to be market leaders."  Unquote.

On the surface, this is just an interesting business story but is there more to it than just an exchange of keys?

As Swaraj Baggonkar wondered in a recent Money Control  piece, how did the Nair family lost the keys to its hospitality treasure?

In this Money Control podcast, we will try and answer this question.

As Swaraj wrote in Money Control, It was a succession plan that did not pan out as envisioned.

Less than five years after founder  Capt CP Krishnan Nair handed over the company's reins to his two sons Vivek and Dinesh Nair, most of its key assets, including brand Leela, have been sold.

On March 20, the board of Hotel Leelaventure, which owns the Leela brand and runs properties under it, decided to sell all but one of its assets, under a slump sale arrangement to Canada's real estate fund Brookfield Asset Management.

Brookfield owns and manages 155 hotels in US, UK and Australia.

And what exactly has exchanged hands? As the piece informs, Leela's operational hotels in Delhi, Udaipur, Chennai and Bengaluru (having a total of 1,017 rooms), a land parcel in Agra (near the Taj Mahal), leasehold rights for land in Bengaluru and license agreement for Mumbai property form the core of the deal.

The piece informs that though Leela intends to use the Rs 3,950 crore for repaying its Rs 4,000 crore debt, this multi-layer transaction has benefitted Brookfield more than Leela.

For instance, the sell-off of the 206-room Goa property in 2015, fetched Leela Rs 721 crore, translating to Rs 3.5 crore per room.

We quote, "Brookfield managed to get the four properties (all located at prime locations) for a valuation that is not very different from the Goa hotel transaction, a good deal considering the Canadian company also got brand Leela and other assets. It is evident that there has not been any healthy appreciation in the value of its properties during the last four years." Unquote.

The Money Control piece traces the sequence of events leading to the asset exchange thus.

We quote, "In February, JM Financial Asset Reconstruction Company (JMFARC) filed an application with the National Company Law Tribunal, Mumbai bench, against Hotel Leela. The application was under Section 7 of the Insolvency and Bankruptcy Code 2016. This was done to get the best valuation even as the powers of the promoters of Hotel Leela becomes limited in the tribunal." Unquote.

JMFARC, we learn, had made brothers Vivek and Dinesh Nair forgo salaries for two consecutive years, as it controls 96 percent of the Hotel Leela’s debt. The company had also been in talks with  many interested parties including private equity investors, asset management companies, state-backed investment funds and other prospective bidders. However on most occasions, the talks fell through over asset valuation, says the Money Control piece.

Things came to a head when Hotel Leela started defaulting on quarterly interest payments on debentures to Life Insurance Corporation (LIC) of India in 2018. By end the end of last financial year, Leela's debt climbed Rs 3,800 crore.

The piece traces the developments after  Capt. Nair's demise in 2014,  and the manner in which the company struggled to push itself to profitability, mainly due to the ballooning cost of finance that eroded its margins repeatedly.

Facing a debt of nearly Rs 5,000 crore, Leela was , to use a cliche, stuck between a rock and a hard place.

We quote, "Unlike its competitors such as Hyatt, Marriott and Intercontinental, who run readymade properties on management contracts, the management at Leela decided to infuse own funds to build new properties. As most of this was done through debt, the interest payout on the loans made it difficult to avoid losses." Unquote.

Even  the formidable Indian Hotels Company , that runs Taj Hotels, switched to the management contract route after years of continuous losses. As the piece informs, termed as asset-light strategy, management contracts help keep fixed costs considerably low compared to the asset heavy (ownership) model.

As the piece says, the trouble was simmering for a long time. Even before Nair's demise, the company had already sold off its luxurious Kovalam property and an IT Park in Chennai but the high level of debt forced the company to keep exploring sale of properties. Soon after the Goa property was sold, it was followed by monetisation of another IT park in Kochi.

If the current deal goes through Hotel Leela will switch to becoming a management company from an ownership company. It will continue to run all its current properties which will be under three different ownerships.

The Nair family, as has been repeated in news reports,  has also formed a joint venture with Brookfield for the purpose of carrying out certain development activities jointly, according to a statement made by Leela.

Against the backdrop of the current developments, it is important to remember the legacy of a brand that carried with it, a sense of fate.

As a recent piece in .ibtimes.co.in recalls, Leela Group's founder, CP Krishnan Nair, who died on May 17, 2014, aged 92, hailed from a nondescript village in present-day Kerala, and was a visionary industrialist with a keen sense of destiny.

Prathapan Bhaskaran writes and we quote, " The group's rise as a luxury hospitality brand was meteoric since the launch of The Leela Hotel in 1987 in the sleepy Sahar village on the outskirts of the city, then known as Bombay. It was the first luxury hospitality property near the Sahar international terminal of the Bombay airport that began operations in 1981. Bombay spread fast to include Sahar in its heart and became Mumbai taking along with it the Leela Group's hotel business to stratospheric levels of success." Unquote.

As the piece says, The Leela Group went on to spread wings far and wide with luxury properties in almost all metros and major cities of the country and tie-ups with several major overseas hotel chains.

Nair did not begin with a lot of advantages and came from a lower-middle-class family in the Malabar district of Madras Presidency of British India. His father, informs the piece, was a government bill collector  and his mother was a rice farmer. he studied in a government elementary school, grew up with a strong patriotic fervour and  joined the Indian Army in 1946. He rose to be a captain in the Martha Light Infantry.

In 1950, he married Leela Nair and post retirement dabbled with several business ventures, dealing with production and export of handloom fabric and took up government assignments for trade promotion in the West.

As the piece says, the idea of opening a luxury hotel struck Nair  during his travels to the West as part of trade delegations. After the Partition in 1945, Bombay airport became the key international hub of South Asia.

We quote, “The growth resulted in the construction of a separate international terminal in Sahar. Nair seized the opportunity to build his first luxury hotel, the Leela Hotel in Sahar and there was no looking back after that. The Leela Group has grown into an industrial and business conglomerate with interests in hospitality, fashion, lifestyle and real estate sectors.

Nair built his business empire in the name of his wife who has survived him along with two sons Vivek and Dinesh, who are respectively the chairman and co-chairman of the group after Nair retired in early 2013.” Unquote.

In 2010,  Nair was the recipient of Padma Bhushan .  He  also received the American Academy of Hospitality Sciences' (AAHS) Lifetime Achievement Award and the United Nations Environment Programme (UNEP) included him on the Global 500 Roll of Honour in 1999. The Geneva-based International Hotels and Restaurant Association honoured him with the Hotelier of The Century Award in 2009.

Would he have approved of the present turn of events? It is hard to say.

A piece in skift.com by Raini Hamdi  wonders if the brand will carry  the same weight post the recent  acquisition  which is Brookfield’s first in India’s hospitality sector, although it invests heavily in the country in other sectors.

We quote, “It is also Brookfield’s first multiple-asset luxury hotel brand, and the company is also more known for acquiring assets at a significant discount then turning them around, than as a brand manager.” Unquote.

Though Vivek Nair, Chairman and Managing Director of Hotel Leelaventure, has told  The Economic Times  that  he is confident that the brand will receive a boost and be further strengthened and continue to be known for its world-class services, the future is uncertain for now.

We quote, “ Hotel experts in Asia-Pacific aren’t so sure. One group believes it will be a boost for the brand, another is less sanguine.” Unquote.

The piece quotes Robert Hecker, managing director of Pacific Asia for Horwath HTL  and he says, “There’s always the chance they’ll ruin the brand, but certainly that wouldn’t be the typical plan. Typically, they are buying the brand for the reputation/value it has amassed up to that point and would then be planning to leverage greater value from it. This could be any combination of providing capital for reinvestment and expansion, instituting cost discipline/cutting, implementing better systems, using the brand for other things, et cetera. The intention of buying the brand in the first place would be to unlock greater value in it.

It’s different from the classic investment banker scenario of buying a company simply to sell off its individual assets that are worth more that way than under the current company ownership. When it’s really the brand they are buying, it’s typically about using and growing the brand for greater value/profit.” Unquote,

The piece also cites Robert Williams, a partner and head of hotels & hospitality for Asia-Pacific at Withersworldwide,  who says,  “This looks primarily like a real estate play. Brookfield is mostly a real estate investor. It may sell off the assets individually, or could look to refurbish and reposition to maximize their potential, then divest. We should expect them to sell the brand and management platform. They will look hard for the best angle. Brand businesses are rarely the same after being bought.” Unquote.

He added. “Sometimes they get better, sharper — access to cash, distribution and human resources can unlock their potential. Sometimes they lose it — swallowed by a group that does not understand their positioning and denies them oxygen. Integration after any M&A is notoriously challenging. Culture clashes, strategy execution and unlocking synergies that have been touted to investors/shareholders are always huge challenges.” Unquote.

The piece also informs that apart from Brookfield, a consortium of investors that included BlackRock, SSG Capital, and RB Capital, and another led by Minor International and Trinity White City Ventures, were suitors of the hotel chain. The latter backed out as it was not willing to pay that big a price. Its bid was $350 million.

Brand Leela , as is obvious, is in the throes of  change and how it negotiates with it will define how Capt Nair’s legacy is treated and preserved for posterity.