International Property

Time for HNA to check out of Spanish hotel after getting kicked off its board?

Proceeds from the sale could ease Chinese conglomerate’s refinancing pressure. After US$40b of purchases since the start of 2016, interest expenses have bloated to US$2.4b, exceeding earnings before interest and taxes

PUBLISHED : Friday, 03 November, 2017, 4:02pm
UPDATED : Friday, 03 November, 2017, 11:34pm

HNA Group’s precarious grip on a US$2.2 billion Spanish hotel company remains in doubt as a mountain of debt becomes due, and China puts the squeeze on its most-prolific acquirers.

The Chinese conglomerate, whose assets include a quarter of Hilton Worldwide Holdings, owns about 30 per cent of Madrid-based NH Hotel Group.

But HNA is in Spanish limbo: its directors have been booted off the board in a shareholder revolt, while Beijing’s crackdown on overseas deals would obstruct any buyout that could bring NH Hotel to heel. Analysts anticipate a sell-out.

A sale of HNA’s stake, which has a market value of more than 550 million (US$641 million), might attract European hotel operators or real-estate funds, according to Oddo & Cie.

The Spanish company’s inventory of almost 60,000 hotel rooms – stretching from New York to Luxembourg to Shijiazhuang in China – would appeal to Accor, making the French rival the most obvious suitor, according to Bankinter Securities.

“HNA is better off selling the NH stake,” said Todd Schubert, head of fixed-income research at Bank of Singapore.

“As a 30 per cent stake holder, they really don’t have any control. By selling they would both get rid of an asset that is a public-relations problem while also raising some much-needed liquidity.”

Proceeds from the sale could ease the conglomerate’s refinancing pressure. After the once little-known airline operator went on a debt-fuelled acquisition spree – with more than US$40 billion of purchases announced since the beginning of 2016 – its interest expenses bloated to 15.6 billion yuan (US$2.4 billion), exceeding earnings before interest and taxes.

HNA just sold China’s most expensive short-term dollar bond ever, highlighting concerns among investors about its high financial leverage.

NH Hotel, which operates about 400 properties in 30 countries, was losing money when HNA invested in 2013. After a debt refinancing, NH Hotel returned to profit in 2015 and expects to generate net income of 100 million euros in 2019, according to targets announced in September.

But after HNA extended its hotel-buying spree, the Spanish alliance unravelled. NH Hotel investors ousted HNA’s four board representatives in June 2016, claiming they were conflicted because HNA also agreed to buy competitor Rezidor Hotel Group AB. In September, a Spanish court reaffirmed that putsch.

That decision left the Chinese conglomerate, even as NH Hotel’s largest investor, with no say in how the business is run.

Simultaneously, HNA – which also owns about 10 per cent of Deutsche Bank – is being reined in by Chinese authorities. They’ve put hotel investments on a list of restricted deals as President Xi Jinping clamps down on mounting debt and capital outflows to protect the yuan.

As Europe’s largest hotel operator and the owner of the Novotel, Ibis and Mercure brands, Accor may be interested in HNA’s stake, said Javier Hombria Gestoso, an analyst at Bankinter Securities in Madrid. He described Accor as “the primary suspect in terms of public companies” that could emerge as buyers.

As a 30 per cent stake holder [in Madrid-based NH Hotel Group], HNA really don’t have any control. By selling they would both get rid of an asset that is a public-relations problem while also raising some much-needed liquidity
Todd Schubert, head of fixed-income research at Bank of Singapore

Accor and NH Hotel both focus on business travellers, and could broaden Accor’s European footprint, said Fehmi Ben Naamane, an analyst at Oddo & Cie in Paris. Accor also expects to raise more than 4 billion euros from selling a stake in its HotelInvest property unit.

“Accor could be a good fit for NH,” Naamane said.

There’s also scope for an investment fund that’s focused on real estate to pursue HNA’s stake, then later spin off the property component. Either way, any buyer of HNA’s stake probably would make an offer for the rest of NH Hotel, Naamane said.

HNA declined to comment, while representatives at NH Hotel and Accor didn’t immediately respond to requests for comment.

Rival hotel groups also may be interested. El Confidencial reported in September that Spain’s Barcelo Hotels & Resorts had hired Banco Santander SA to assess a possible merger with NH Hotel.

To be sure, HNA may prefer to wait things out rather than sell.

The conglomerate’s ultimate goal may be to merge its Brussels-based Rezidor hotel group with NH Hotel: Rezidor said last year it planned to study such a union as part of a plan to turn Rezidor into a global hotel chain. Such a combination “seems justifiable,” said Guilherme Sampaio, an analyst at Banco BPI SA.

But HNA first would need to overcome both NH Hotel shareholders and opposition in Beijing.

Plus, an exit from NH Hotel would unravel the Chinese company’s maiden overseas hotel acquisition – n an industry that’s become one of its core investment areas.

“HNA needs to do something,” said Nigel Stevenson, an analyst at Hong Kong-based GMT Research. “It could engineer a takeover by another company, enabling it to exit at a premium.”