It was a succession plan that did not pan out as envisioned.
Less than five years after founder Capt CP Krishnan Nair of Hotel Leelaventure 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.
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 present deal has similar terms, despite entailing much more.
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.
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.
JMFARC, which made brothers Vivek and Dinesh Nair forgo salaries for two consecutive years, controls 96 percent of the Hotel Leela’s debt. The company had been in talks with a variety of 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.
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.
How did Leela get into this mess?
Leela Hotels closed FY14 with a debt of nearly Rs 5,000 crore. After Capt. Nair’s demise in 2014, the company was struggling to push itself to profitability, mainly due to the ballooning cost of finance that eroded its margins repeatedly.
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.
One of India’s largest hotel firms Indian Hotels Company , that runs Taj Hotels, switched to the management contract route after years of continuous losses. Termed as asset-light strategy, management contracts help keep fixed costs considerably low compared to the asset heavy (ownership) model according to the reports published in moneycontrol.com.
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 has also formed a joint venture with Brookfield for the purpose of carrying out certain development activities jointly, a statement from Leela said.
Though Leela said it 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.