Govt. takeover via new Bill only way out of morass for Colombo Hilton owner Hotel Developers: Analys

Friday, 4 November 2011 02:59 -     - {{hitsCtrl.values.hits}}

A Government takeover and coming under a Competent Authority is said to be the only way out for beleaguered multibillion-rupee-loss-making and debt-saddled Hotel Developers Lanka Plc, (HDEV) the owning company of Colombo Hilton.

Analysts said that HDEV’s carried forward losses were now Rs. 10 billion, whilst it owes Rs. 12 billion in debt to the State, with its cash flows unable to serve Rs. 1.6 billion in interest fully.

The company also doesn’t own the land on which the hotel is built, which is also vested with the State due to non-payment of lease rental to lessor, the UDA.

By virtue of the fact that the land and hotel building and the immovable assets now belong to the State, analysts said that the upcoming Expropriation Bill/Act was best suited for HDEV to come out of its morass.

Furthermore, the company is also infested with litigation, with at least seven protracted and pending cases.

Analysts said that the Expropriation Bill provides for takeover and under a Competent Authority, the HDEV could be comprehensively restructured to ensure an end to further deterioration, loss of revenue to the Government and long-term viability or garner better stakeholder value.

It was pointed out that a takeover and coming under the Competent Authority would also put an end to exorbitant contractual obligations agreed originally with Hilton at the time of HDEV’s founding.

“With a litigation-free, newly-negotiated management deal with Hilton or another chain in line with market rates, HDEV can generate more revenue for much-needed refurbishment,” analysts added.

HDEV is listed as the sole underperforming enterprise in the Expropriation Bill/Act, which however is being vehemently opposed in principle by the UNP.

Meanwhile, HDEV has called for an EGM on 21 November over the serious loss of capital (its negative net worth is now nearing Rs. 5 billion). It is also struggling to service some of its interest payable to the Government. As per the Companies Act, HDEV is a sure candidate for a voluntary windup since it can’t honour debt.

On top of this, the exorbitant fees it pays to Hilton Worldwide have put the survival of HDEV under serious threat, analysts said.

Carrying the legacy of a deal signed in 1984, Hilton’s management fee and other Group charges are estimated at 30% of Gross Operating Profit. In comparison the current practiced rate is considered to be below 10%, whilst Hilton charges only a 12% GOP management fee on Hilton Residencies.

As Hilton continues to milk valuable revenues, in the interim HDEV Board said recently that talks had begun with Hilton to renegotiate fees.

The Management Agreement with Hilton Worldwide (formerly Hilton International) was signed in 1984, with an initial period of 20 years, with the right for renewal by Hilton for another 30 years (three successive periods of 10 years each).

Taking cover under the provisions in the agreement, Hilton has unilaterally extended the term on the same conditions, without providing the company to renegotiate the terms.

In March 2008 the company instituted arbitration proceedings against Hilton Worldwide on the basis that Hilton did not have the right to operate the hotel after 31 December 2007. However, the arbitration proceedings were stayed following negotiations between the company and Hilton Worldwide.

The total debt of Rs. 12 billion as at 31 March 2011 to the Government comprises Rs. 4.4 billion of capital and Rs. 7.6 billion in interest. Analysts said current cash flows could only provide 40% of the annual interest, which is estimated to be around Rs. 1.6 billion.