Thiru trims Hilton!

• Hotel Developers successfully negotiates down total fees to be charged by global brand in running premier 5-star in Colombo to 11.75% of Gross Operating Profit from 33%
• New proposed management agreement before Cabinet Sub Committee for Revival of Underperforming State Enterprises to help save Rs. 171 m per annum for owning company
• 1984 agreement offering unilateral and perpetual extensions to operating term now reduced to 2019 from the original 2037, extendable further on mutual terms for successive periods of 10 years

The Board of Directors of Hotel Developers (Lanka) Plc led by Chairman Thiru Nadesan has succeeded in negotiating a highly-favourable new deal for Colombo’s premier five-star with its management partner Hilton Worldwide.

The deal, firmed up following several rounds of negotiations, envisages total fees to be charged by Hilton Worldwide and its Singapore regional office in managing the Colombo property to 11.75% of Gross Operating Profit (GOP) from the current 33% of GOP.

The latter has been widely considered by hotel experts as exorbitant whilst the global norm is around eight to 10% of GOP. Despite requests, previously Hilton had been allegedly adamant, refusing to revise downwards except up to 26%. In that context the new proposed fee of 11.75% is being described as a breakthrough.

Sources said that the new fee proposed would result in a considerable saving of Rs. 171 million per annum. 

This is likely to make Hotel Developers more viable and improve prospects for refurbishment, though it continues to be saddled with a Rs. 10 billion loss in addition to debt worth Rs. 12 billion.

In the company’s 2009/10 Annual Report, the management fees and other group charges paid to Hilton Worldwide between 2011 and 2010 was put at a hefty Rs. 1.37 billion.

Another significant negotiation was reducing the operating term of Hilton to 2019 as opposed to 2037 as per the original agreement signed. Previously Hilton had the right to extend the operating term unilaterally and perpetually, whereas under the new deal further extensions would be on mutual terms and for successive periods of 10 years.

In view of the absence of the restriction clause in the original deal signed in 1984, it has been proposed that Hilton will not be allowed to operate another hotel within a 25 kilometre radius of its existing property, excluding Hilton Residencies (formerly JAIC), which is also managed by Hilton at an estimated fee of 11% of GOP. The exclusivity clause however ensures that the marketability of Hilton Colombo is not compromised. Hilton has proposed the area of restrictions to be limited to 15 kilometres.

The new proposed agreement is before the Cabinet Sub Committee on the Revival of Underperforming Enterprises as Hotel Developers was acquired by the State under the Revival Act recently.

Among other new conditions is for all material procurement for the hotel to be in compliance with Government guidelines since Hotel Developers is now under the Revival Act. A fresh requirement is to bring the Power of Attorney given to Hilton in line with the provisions of the Companies Act of 2007.

Industry analysts noted that Hilton continues to be the most sought after 5-star property in the city and it has remained committed to Sri Lanka even amidst the worst of times. This, it was pointed out, needs to be recognised.

However, the hotel needs urgent refurbishment especially ahead of the Commonwealth Heads of Government’s Meeting which Sri Lanka will host in 2013 and Hilton being the first choice for visiting international leaders.

With Shangri La planning to open shop by 2015 and several other major brands expressing interests to launch operations, Hilton also needs a total overhaul in addition to expansion to better cater to the envisaged boom in leisure and business travellers to the country.

At present Hilton Colombo commands around 384 rooms, whilst it has enough space for new development.