City Lodge buys out remaining Fairview stake for Sh1.88bn

South African hotel chain City Lodge has completed the takeover of Fairview Hotel by snapping up the remaining 50 per cent stake for Sh1.88 billion.

The hotelier’s 2014 annual report says it took the remaining half in a transaction done in May this year.

“The purchase consideration transferred on acquisition amounted to rand 231.4 million (Sh1.88 billion) in cash. No other consideration was transferred,” says the annual report.

The Johannesburg Stock Exchange-listed hotel chain added that it had to borrow to complete the purchase.

“To fund the purchase of the remaining 50 per cent of the Kenyan joint venture, an amount of R150 million (Sh1.22 billion) was drawn down in May from existing long-term borrowing facilities which were extended to R250 million (Sh2.02 billion) from R200 million (Sh1.62 billion),” said the report.

Payment for the remaining 50 per cent stake values City Lodge’s two local hotels, Nairobi-based Fairview Hotel and Town Lodge, at Sh3 billion. Town Lodge was previously known as Country Lodge.

It bought the first 50 per cent stake in Fairview Group for Sh1.2 billion in 2013. The South African hotel chain is also set to put up a three-star hotel in Nairobi’s Runda area for Sh2 billion.

READ: Fairview owner to build Sh2bn hotel in Runda

Local and international hotel chains have in the last few years been expanding to cater for the growth of business travel as Nairobi becomes a busier regional hub.

Expansion has either been through entering into management contracts or buying out existing companies. Research by hoteliers show the choice is determined by the risk appetite by the investor.

A paper by HVS, a global consultant on hotels, restaurants and the gaming industry says, that high-risk investors such as equity funds prefer to enter into hotel management agreements (HMS) with operators.

The investors own the assets and have the hotel chains run operations in exchange for a management fee and a commission on the profits.

HVS says low-risk investors such as insurance firms prefer to enter into leases with hotel chains where they earn a standard fee such as annual rent.

HVS, however, says that in light of a tough global economy and limited debt on the international market, investors in the industry have had to use a mix of leasing and entering into management contracts.

“It seems that hotel contracts are reaching a level of optimal balance between operators’ and owners’ return, while preserving the value of the asset which is ultimately what sustains both returns,” says research by HVS.

City Lodge’s expansion into Kenya has been through construction of its branded hotels and buying out existing hotels such as Fairview.

The industry has taken a hit from insecurity, but some hoteliers are going on with pre-planned investments.

Grenadier Ltd which owns Sankara Hotel Group is constructing a hotel targeting business travellers and diplomats also in Runda.