Can India’s Leela Hotel Brand Be the Same Under Asset Manager Brookfield?

One of India’s storied hotel brands, Leela, is going to the house of Canadian company Brookfield Asset Management, along with four of five Leela hotels owned by insolvent Hotel Leelaventure.

The deal was disclosed by Hotel Leelaventure in a stock exchange filing earlier this week. A Brookfield-sponsored private real estate fund will pay $576.4 million for the four Leela hotels in Bengaluru, Chennai, Delhi, and Udaipur, as well as another Hotel Leelaventure property in Agra, and for the brand. All hotel management contracts currently in operation and contracts for hotels under development are also part of the deal.

Known in full as The Leela Palaces, Hotels and Resorts, the brand has nine hotels in operation and four forthcoming launches in Jaipur, Agra, Bengaluru, and Kerala.

The sale has been in the making since last year. As Skift reported, the Mumbai-based company has been struggling with debt for nearly a decade, a period when the luxury hotel sector in India was battling a glut and the aftermath of the 2008 global financial crisis.

Reports tipped that Brookfield was close to buying a majority of the Indian chain’s hotel assets for a higher price, $646 million. This however included a large land parcel. The confirmed deal of $576.4 million will still be able to cover Hotel Leelaventure’s debt of $550 million (3,800 crore), a sum disclosed in its annual report 2017-2018.

The transaction is expected to be completed within six months.

Crown Jewels

The hospitality business is Leelaventure’s cash cow, accounting for 88 percent of the company’s total net worth. The four hotels sold to Brookfield are its crown jewels, generating 80 percent of the company’s total income of $10.8 million (743 crore) in 2017-2018 financial year.

The fifth hotel it owns, Leela Mumbai, which isn’t being sold to Brookfield, was the first Leela to open 33 years ago. It will continue to operate as Leela under a license agreement with Brookfield.

The name Leela is held in the same esteem as India’s other legacy brands such as Taj and Oberoi. But the question is will it shine or wither under an asset management company?

The acquisition is Brookfield’s first in India’s hospitality sector, although it invests heavily in the country in other sectors. It is also Brookfield’s first multiple-asset luxury hotel brand, and the company is also more known for acquiring assets at a significant discount then turning them around, than as a brand manager.

Vivek Nair, Chairman and Managing Director of Hotel Leelaventure, was quoted in The Economic Times of India as saying he is confident that the brand will receive a boost and be further strengthened and continue to be known for its world-class services.

Hotel experts in Asia-Pacific aren’t so sure. One group believes it will be a boost for the brand, another is less sanguine.

“There’s always the chance they’ll ruin the brand, but certainly that wouldn’t be the typical plan,” said Robert Hecker, managing director of Pacific Asia for Horwath HTL. “Typically, they are buying the brand for the reputation/value it has amassed up to that point and would then be planning to leverage greater value from it. This could be any combination of providing capital for reinvestment and expansion, instituting cost discipline/cutting, implementing better systems, using the brand for other things, et cetera. The intention of buying the brand in the first place would be to unlock greater value in it.

“It’s different from the classic investment banker scenario of buying a company simply to sell off its individual assets that are worth more that way than under the current company ownership. When it’s really the brand they are buying, it’s typically about using and growing the brand for greater value/profit.”

But Robert Williams, a partner and head of hotels & hospitality for Asia-Pacific at Withersworldwide, is less sanguine. “This looks primarily like a real estate play. Brookfield is mostly a real estate investor. It may sell off the assets individually, or could look to refurbish and reposition to maximize their potential, then divest. We should expect them to sell the brand and management platform. They will look hard for the best angle,” said Williams.

“Brand businesses are rarely the same after being bought,” he added. “Sometimes they get better, sharper — access to cash, distribution and human resources can unlock their potential. Sometimes they lose it — swallowed by a group that does not understand their positioning and denies them oxygen. Integration after any M&A is notoriously challenging. Culture clashes, strategy execution and unlocking synergies that have been touted to investors/shareholders are always huge challenges.”

Apart from Brookfield, a consortium of investors that included BlackRock, SSG Capital, and RB Capital, and another led by Minor International and Trinity White City Ventures, were suitors of the hotel chain. The latter backed out as it was not willing to pay that sort of price. Its bid was $350 million.