Covid-19 induced losses increase acquisition risk for Hotels

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The covid-19 pandemic has decimated the market value of hotels in Nigeria priming them up as a target for private equity firms looking to acquire big hospitality assets on the cheap.

A cursory review of the market capitalization of hotels quoted in Nigeria reveals a massive drop in their value in 2020.

Capital Hotels operate the Abuja Sheraton Hotel, Transcorp Hotel owns the Transcorp Hilton, Ikeja Hotels owns the Sheraton Hotels Ikeja and Tourist Company owns the Federal Palace Hotels Victoria Island are the only publicly listed hotels on the Nigerian Stock Exchange.

READ: Bottom Line: Sheraton Hotel Abuja, Too much cash no value

According to our data, the total market capitalization for these is about N49.2 billion a 46% discount to their net book value as of December 2020. Thus with about $125 million, a private equity firm can theoretically acquire all the hotels listed on the Nigerian stock exchange. The same can be inferred for privately owned hotels that have also suffered a tumultuous 2020.

What this means

The impact of these negative headwinds will expose some of these hotels as targets for potential acquisitions. Some carry huge debts on their balance sheets that they may not be able to finance in the short to medium term making it impossible to avoid raising capital soon.

  • Recently, Transcorp Hilton concluded a capital raise of N10 billion which it immediately used to defray its long-term expensive debts. Our sources inform us owners of Abuja Sheraton Hotel and Federal Palace hotels are also exploring potential capital raise to fund defray debts and also embark on refurbs.
  • TCN for example has a related party debt of N25.7 billion which it also has to repay at some point in the future either by raising equity or paying from its cash generated from operations. The latter is unlikely for now.
  • Nairametrics Analysts team believes if its cash flow situation persists, we could see an inter shareholder deal that will either force the majority shareholders to buyout the Nigerian shareholders or vice versa. Sun International, a South African entity owns 49% of the company while its Nigerian partners, mostly represented by the Ibru family owns above 50%.
  • Ikeja Hotels, the owners of Sheraton Hotels Ikeja, has no external loans but owes its related parties N7 billion. It recently concluded the first part of its refurb,
  • Capital Hotels which we understand has been in the market for a potential sale is the cherry of the pie with no debt and is valued at 78% less its net assets. It appears so undervalued, the company has a market valuation of N3.4 billion despite having N1.5 billion cash in the bank.
  • But the hotel requires a massive injection of cash to fund its much overdue refurb. However, it will first need to sort of internal wranglings affecting its ability to raise capital.

READ: Aella Credit raises $10 million debt financing round from Singapore 

While raising capital is imperative the hotels have also considered reviewing their business model, channeling capital to adapt to the requirement of the so-called new normal. For example, they will need cash to invest in the safety equipment and technology required to meet the needs of health-conscious customers.

2020 is a year to forget

Financial data from the only quoted hospital companies on the stock exchange – Capital Hotels, Transcorp Hotels, Ikeja Hotels, and Tourist company of Nigeria reveal losses totaling N17.5 billion compared to a profit of N640 million recorded a year earlier.

The losses were triggered by revenue declines caused by the covid-19 pandemic forced economic lockdowns and social distancing rules that plummeted hotel occupancy rates. These hotels are some of the biggest in the country and a reflection of how branded hotels have suffered throughout an atrocious 2020.

READ: Notore Chemicals is swimming in debts – company to access equity market in Q2 2021

The hotels reported combined revenue of N18.4 billion down 55.8% when compared to the N41.7 billion in combined revenues reported a year earlier. The loss in revenues represents over a quarter worth of sales epitomizing how devastating the lockdown was for their business.

Nairametrics reported in September that hotels were on the brink of collapse after third-quarter results had them reveal a nearly 90% drop in revenues. But despite the gloomy outlook, the fortunes of some of the hotels improved marginally in the fourth quarter of the year as they recorded a boost occupancy rate for some of these hotels.

READ: NSE Exchange Traded Funds (ETF) market capitalization hits N24.51 billion

For example, Ikeja Hotels reported revenues of N1.4 billion in the last quarter of the year compared to N306 million in the third quarter of the year. They were aided by Nigerians in the diaspora returning for the Christmas and New Year holidays. However, this was not enough to avoid the loss in revenues and incremental businesses they incurred in 2020.

Transcorp Hotels, the largest hotel chain in the country recorded a 60% drop in revenues forcing the hotel chain to reduce its workforce and seek alternative forms of revenues. For example, room revenues fell by almost 50% from N12.6 billion in 2019 t0 N6.5 billion in 2020. Its revenue from food and beverage also fell from N5.9 billion in 2019 to N2.5 billion in the current year.

Ikeja Hotels, operators of Ikeja Sheraton and one of the biggest and busiest hotels in the country recorded a revenue drop of 62% to N2.9 billion. Food and beverage revenues also dropped from N4.1 billion to N1.5 billion for the hotel capping a disastrous year for the hotel.

This dip in revenues confirms second and third quarter GDP declines for the accommodation and food services business, a category that includes hotels. GDP contraction in the second and third quarter was 40.1% and 22.6% respectively for the sector. The sector is expected to remain in a recession this year.

While the easing of the lockdown in the third and fourth quarters of the year may have improved the fortunes of the hotels the second wave of the coronavirus has upended any thoughts of a v-shaped recovery for the hotel sector as flight restrictions across Europe and the US.

Whilst capital raise is imminent for these hotels, its immediate challenge is to stop the bleed.

 

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