TravelMONITOR

Clout of private funds worries hotel workers

IMTIAZ MUQBIL

Even as consultancy companies begin to keep an eye on cronyism and nepotism among the boards of public lodging companies (Travel Monitor, April 2), global trade unions are beginning to track the movements of private equity funds, many of which are becoming prime investors in the cash-rich travel and tourism industry.

The IUF, a Switzerland-based federation of international unions in the hotel, catering, food and farm sectors, has launched a website [www.buyoutwatch.info] to promote transparency and accountability in the way private equity funds do business and strengthen the unions' collective response against what they fear will be ''a catastrophic impact on employment and working conditions''.

An IUF commentary accompanying the website has this to say about private equity funds: ''Likened by some to a plague of locusts, private equity funds have emerged as major owners of companies in the IUF and other manufacturing and service sectors. The top global buyout funds now control more overseas assets, and employ more workers, than the traditionally ranked leading TNCs.

''Trillions of dollars in recent years have gone into acquiring, restructuring and disposing of the companies, often with a catastrophic impact on employment and working conditions. With 2007 now being talked about as the year of the hundred billion dollar 'deal', leveraged buyouts cast a long shadow over our sectors and the global economy as a whole.''

One specific section comments on the rising number of private-equity buyouts in the hotel industry noting that their only interest in hotel real estate is as a financial asset, not as a hotel business, which ''has led to significant changes in the priorities and goals of hotel management.''

''These changes are based on financial targets that include extraordinarily high rates of return to shareholders (15-20%), financing new hotel properties through debt rather than re-investing profits and the rapid acquisition and liquidation of hotel properties as 'real estate assets'.''

According to the IUF commentary, ''The strategy of separating hotel business operations from ownership of hotel properties is geared toward 'unlocking' the financial value of real estate assets.

''Hotel properties are sold not on the basis of business performance or profitability, but as a means of generating cash flow needed to satisfy the short-term demands of shareholders. As a result, hotels are seen by investors not as a long-term, viable service-provider, but as a bundle of assets to be deployed or redeployed depending on the short-run rates of returns that can be earned.

''This transformation of hotel properties into a bundle of assets that can be bought and sold on a short-term basis is largely the result of the entry of new financial players such as Real Estate Investment Trusts (REITs) as owners of hotel properties and private-equity funds as owners of real estate, hotel companies and/or brands.''

The commentary says that in several countries the buyout activities of private-equity funds, geared toward large, short-term returns, have involved asset-stripping and closures.

''This destructive approach has led them to be labelled 'locusts' in Germany. Private equity funds undertake buyouts on the basis of an exit strategy, cashing in on the investment within three to five years. This is the opposite of a committed, long-term investment geared to the development of the company.''

The commentary noted that even in Europe, where private-equity fund involvement in the hotel industry was relatively new, from 2001 to 2003 an average 33% of all transactions in hotel properties were the result of private-equity fund buyouts and divestments.

''The largest private-equity fund in the world, Blackstone Group, acquired five hotels in the past year, including the purchase of the hotel REIT MeriStar Hospitality Corporation (which owns 57 hotels under the Hilton, Sheraton, Marriott, Ritz-Carlton, Westin, Doubletree and Radisson brands in the US) for US$2.6 billion.

''In 2005 Blackstone bought Wyndham International hotel group for $1.44 billion and subsequently sold the brand and franchise system to Cendant. In Europe, Blackstone recently bought the Hospitality Europe hotel group for $790 million.''

It added, ''Starwood Capital Group a US-based private-equity fund that holds $14 billion in real estate assets, including Starwood Hotel & Resorts Worldwide Inc. (Sheraton, Luxury Collection, Four Points by Sheraton, Le Meridien, Westin, St Regis, W Hotels) with 850 hotel properties in 95 countries and 145,000 employees. Starwood Hotel & Resorts Worldwide Inc is in fact a hotel REIT that was merged into other Starwood companies and the holding company, Host Marriott Corporation, in 2005.

''Even hotel properties that are not taken over by private-equity funds are subject to new financial pressures. Shareholders of hotel companies expect the same high rates of return paid out by these new financial players, which in turn shifts the priorities and goals of management.

''In fact, financialisation does not necessarily require a change in ownership to have an impact on the workplace. The threat of a hostile takeover, falling share prices or the withdrawal of investment funds may be sufficient to change business plans and investment decisions to meet the short-term demands of financial investors,'' the commentary said.

Imtiaz Muqbil is executive editor of Travel Impact Newswire, an e-mailed feature and analysis service focusing on the Asia-Pacific travel industry.

Bangkok Post

Monday April 09, 2007