Macdonald Hotels is Selling 27 of its Properties to a Private Equity Player

Main Photo: The Randolph Hotel, Oxford

Date: June 2019

Location: UK

Name: Macdonald Hotels

No. of Keys: TBA

Seller: Macdonald Hotels, headed up by Donald Macdonald, Gordon Fraser Deputy Chairman owning 6.64% of the shares, and Gerry Smith COO.

Buyer: TBA…“a major private equity and real estate investor” without hotel interests at the moment”

Macdonald Hotels is selling 27 of its properties to a private equity player in a deal which will clear its bank debt of nearly £190 million.

The Scottish hotels group, the vast majority of which is owned by 72-year-old industry veteran Donald Macdonald and his family, had total debt in excess of £700 million more than 10 years ago, deputy chairman and managing director Gordon Fraser noted.

Mr Fraser revealed the group’s ability to invest had been constrained in the wake of the global financial crisis, which got under way in earnest in 2008, as it cut its debt.

He said: “Since 2008, we have not had a capital expenditure facility from the bank. Any investment we have had in the properties, we have had to pay for that out of our operating cash flow.”

The portfolio being sold includes Rusacks Hotel, overlooking the 18th green at St Andrews. This hotel has planning permission for a major extension.

Other Scottish hotels being sold include the Holyrood Hotel in Edinburgh, Houston House in West Lothian, the Inchyra Hotel & Spa near Falkirk, Crutherland House Hotel in East Kilbride, the Loch Rannoch in Perthshire, and the Cardrona Hotel, Golf & Spa at Peebles.

Also changing hands in the deal, which is due to be concluded by the end of August, are the Randolph Hotel in Oxford and the Bath Spa, which are both five-star properties, The Compleat Angler on the banks of the River Thames at Marlow in Buckinghamshire, and the Tickled Trout, off the M6 near Preston.

Mr Fraser said the deal followed two years of consideration of the options for the group. He added that Cahal Dowds of Deloitte had helped “weigh up a reassuringly high number of serious offers of both refinancing and acquisition”.

The preferred bidder, described as a “major private equity and real estate investor” without hotel interests at the moment, is not being named at this stage by Macdonald Hotels.

The price being paid for the 27 hotels is not being disclosed. Macdonald Hotels said its bank debt would be below £190m next month. It noted the deal’s completion would enable it to repay in full its current Bank of Scotland debt and invest in its remaining properties, signalling proceeds in excess of the bank debt level.

Mr Macdonald will retain control of 20 hotels and resorts in the UK and Spain, including the four in the Monument business his family owns with Macdonald chief operating officer Gerry Smith.

The four Monument hotels are Pittodrie House and Norwood Hall in Aberdeenshire, the Drumossie in Inverness, and Grange Manor at Grangemouth.

Mr Macdonald, Mr Fraser and Mr Smith, who is 68, will continue to lead the hotels and resorts business being retained.

These properties include four hotels at Aviemore – the Highlands, Morlich, and Strathspey and the Aviemore Hotel – as well as the Dona Lola, Leila Playa, Villacana, and La Ermita resorts in Spain. Also being retained are five resorts in the UK, Spey Valley, Lochanhully at Carrbridge, Forest Hills at Aberfoyle, Elmers Court at Lymington in Hampshire, and Plas Talgarth at the southern tip of Snowdonia National Park in Wales.

THPT Comment: Donald Macdonald a serious veteran of the hotel business both in Scotland and the rest of the UK, going back to Stakis Hotels, which he left in 1990 with just two hotels.

In 1996 Macdonald Hotels & Resorts, which had grown to 100 hotels and resorts (including a number that were originally TrustHouse Forte hotels) with an annual turnover of £240m, was floated on the stock market – a move that Macdonald later admitted was a mistake. “It cost us plenty – in terms of the product – to take the business to market,” he told The Caterer in 2007.

The company was brought back into private hands in 2003 through a £620m management-led buyout in a joint venture with the Bank of Scotland which, at the time, was one of the biggest public-to-private deals ever seen in Scotland.

In 2007, the company sold 24 of its UK hotels to Moorfield Real Estate Fund for more than £400m, a move that helped the business to further establish a solid footing in the four- and five-star markets.

Additional Comment: Macdonald Hotels announced that it would sell the Macdonald name, management platform, headquarters and 27 hotels to a private equity investor reported to be Centerbridge Partners.

The deal will see the group clear close to GBP190m in debt and allow for investment in the remaining hotels and resorts in the UK and Spain.

Centerbridge, reported The Times, will be working with Hamilton Hotel Partners. The fund has around USD14bn in assets under management and launched its real estate platform in 2017, 12 years after being founded. Sources close to Hotel Analyst suggested that it was still too early to know what, if any, changes would be made to the portfolio after the close of the transaction.

The unnamed private equity group, new to the sector, was chosen from a shortlist of four.

In the company’s most-recent accounts, filed on 18 June, the group said: “The directors, over the past two years, have carried out a comprehensive review of the group’s refinancing options. There has been significant inbound interest from investors worldwide to acquire all or some of the group’s assets. The transaction will allow the group’s bank facilities and all creditors to be repaid in full. The substantial remaining business will be debt free and continue with seven hotels and nine resorts located in the UK and Spain.”

The group said that, should the sale fall through, it would look to refinance the business with a combination of asset sales and new debt facilities.

HA Perspective [by Katherine Doggrell]: It’s been a long-hard slog for the UK regional hotel sector and Macdonald Hotels is unlikely to be the last to follow this route.

As the data from Hotstats shows, now is really not the time to be dragging any debt behind you and we can expect a lot more private equity houses to come to the rescue as costs continue their inexorable rise.

What will happen to those hotels now under new ownership remains to be clarified. As noted at the recent Hotel Operations Conference, the third-party operators are eager to get deeper into the luxury sector, confident that they can take on the plague of rising costs and meaning that the global operators, who once counted luxury as their own, may not automatically bolt this new estate onto their portfolios. What happens at Macdonald may set the trend for what the new wave of luxury owners do with their new toys.

Additional comment [by Andrew Sangster]: In my commentary for the print version of Hotel Analyst this spring the headline was: “Welcome to the downturn”. Are Macdonald the first prominent victim of this downturn? Not really.

The company is certainly heavily indebted and as the notes to its accounts show, it had liabilities exceeding current assets by more than £200m at the end of March 2018.

But the group was heavily leveraged at the outset of its reincarnation as a delisted entity back in 2003. Back at the start of 2007, Macdonald sold a portfolio of 24 hotels to Moorfield in a GBP400m plus deal. But even this restructuring was not enough to create a long-term sustainable business as the latest move shows.

In normal business cycles, Macdonald would probably have gone under in 2008 as the Global Financial Crisis took hold. Instead, the combination of troubled banks – HBoS, Macdonald’s banker, was at the heart of the storm – and the slashing of interest rates meant the hotel chain continued to limp along. Until now.

Ironically, it was the stronger businesses that ended up transacting first in this downturn as bankers shored up balance sheets while avoiding writedowns. So, for example, the Mint portfolio, another HBoS client, was sold off in 2011.

This latest move by Macdonald can be viewed as a culling of a zombie. But that would be a little unfair on what is an inherently OK business. The finance brain has rotted but the body is in a lot better shape than the sorts of monsters seen in horror films.

First Seen: The Herald Scotland

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