Pioneering Principles - Investment Outlook - March 2007

Investing in and managing hotels in emerging markets has given Corinthia Group the platform it wants to be a multi-national player.

By Mary Scoviak -- HOTELS Magazine, 3/1/2007

Marriott International’s CEO J. Willard “Bill” Marriott, Jr. is fond of wryly defining a pioneer as “the guy with the arrow in his back.” Alfred Pisani, chairman of the Corinthia Group of Companies, Floriana, Malta (like Marriott himself) is an exception that proves the rule. An appetite for calculated risk has enabled the Pisani family to grow a venture that started “by coincidence” 44 years ago into a regional player that is attracting a US$232 million (€178 million) investment (a transaction expected to close this month) from Dubai’s Istithmar Hotels in its real estate company and a 30% participation from Wyndham Hotel Group, Parsippany, New Jersey, in its hotel management subsidiary. Armed with a hefty cash infusion and global marketing power, Pisani is looking to push the company further into new territory, from brand building throughout Europe, Africa and the Middle East (EMEA) to launching an initial public offering for its real estate company on a major international exchange.

RISK VERSUS REWARD

Consultants say the Pisani family has a sixth sense for finding opportunities that are under the radar. When Malta gained its independence from the United Kingdom, the Pisanis recognized the potential of the country’s shift from a role as a military base to that of an international services provider. They developed one of Malta’s first deluxe hotels (the 150- room Corinthia Palace) on a familyowned estate to capitalize on what they believed would be the nation’s expanding tourism industry. “We were young entrepreneurs. We certainly did not have a plan for the future. We simply put our heads down and focused on the project,” Pisani says.

With a war chest built on heavily reinvested profits, Pisani began looking for expansion possibilities in European countries with emerging profiles like Malta’s. The first step was the addition of a property on the Turkish Riveria. But the breakthrough came with the Pisani’s move into Eastern Europe more than a decade ago. Part of the rationale was an astute understanding of what markets such as Hungary, the Czech Republic and Russia would become; the rest was hard-core fiscal realism. “We could not have targeted major cities such as London or Paris 10 years ago if for no other reason than the lack of access to substantial funds,” Pisani says candidly. “What we believed we could do is to compete effectively in acquiring, developing and managing hotels in Eastern Europe and Russia.” The Corinthia Group also started looking at Malta’s close neighbor, Libya, “which was opening up its economy and welcoming foreign investment.”

Corinthia Palace, Malta, is the hotel group’s flagship property in its headquarter city.

While big brands and global investors continued to shop Western Europe, Corinthia expanded its expertise in countries just beginning to hit their economic strides. What started as an opportunistic move dictated by circumstance evolved into a point of differentiation for Corinthia Group’s investment model. “As investors, we traditionally have targeted mediumrisk countries—like those in Eastern Europe and Russia,” says Simon Naudi, executive director of the group’s hotel ownership company, International Hotel Investments (IHI), and assistant to the president. “It would have been very difficult to match the returns available in these markets with investments in Western Europe.”

Through IHI, the group will continue to explore other markets such as Libya, the Ukraine, Croatia and several of the former Soviet Bloc destinations— destinations where other investors still have a wait-and-see attitude. What does Corinthia see that they are missing? “You need to look not only at the country but at perceptions of the country,” Naudi says. “Take Croatia as an example. When UK banks looked at Croatia some years ago, they saw only the Balkans crisis. Austrian banks had a very different view since Austria is a natural trading partner. You have to drill deeply into the market to understand the real risk-reward ratio.”

LOOKING LONGER TERM

Istithmar Hotels’ investment into IHI will not change Corinthia’s pioneering vision. What it will do, Pisani says, is create a platform that allows for longterm, strategic decisions. At this point, IHI is considering “limited entry” into Western Europe (beyond its current property in Lisbon). Investing in cities such as Paris or even London “would give us a more balanced portfolio of hotel investments,” according to Pisani. “However, we will continue to emphasize opportunities that provide us with the chance for immediate capital appreciation under-pinned in the longer term by strong operating performance.”

By the end of this month, Istithmar Hotels is expected to own 33% of IHI. Like its parent Istithmar, the “alternative investment house that is part of the Dubai government-owned Dubai World group, Istithmar Hotels targets investments “that can earn exceptional returns for investors while maintaining due regard for risk.” Availability of capital at this level gives Corinthia access to a dual strategy of expansion through ownership and management. “We still believe in owning hotels, especially when the circumstances of the acquisition itself or the country offer substantial upfront capital gains,” Pisani says.

The group’s leadership sees a dual emphasis on bricks and brains as a major plus. They are acquiring at a time when the big brands are selling off hotels to unlock capital. It also provides the opportunity for speed in doing deals. Leveraging Istithmar’s investment, IHI hopes to add five or six hotels to its sixhotel portfolio within one to two years. At that point, Pisani says IHI would aim to step up its access to capital with a second listing on a major exchange— most likely in Europe or in the Gulf region. “We are keeping an open mind about when and where to re-list. We do want to remain a public company as our platform grows,” he adds.

Alfred Pisani (center) and Giuseppe Sita, CEO of Istithmar Hotels (right), sign their deal in the presence of Maltese Prime Minister the Honorable Lawrence Gonzi.

GROWING THE BRAND

The Istithmar Hotels connection gives IHI and Corinthia more than just another view of investments. Istithmar CEO Giuseppe Sita, now one of IHI’s directors, brings a skill set that ranges from a stint as a CFO with a vacation ownership company to a tour as executive vice president of development for Carlson Hotels Asia Pacific. He also holds a seat on the board of Kerzner International, one of the other hotel companies in which Istithmar invests.

Attracting partners to fill these kinds of gaps was essential to meeting growth goals. For its management company, Corinthia Hotels International, Pisani saw that an international brand connection would be vital in fasttracking visibility and expansion potential. The choice of a partner went to Wyndham Hotel Group.

The joint venture was not an obvious solution in the eyes of many industry watchers. Critics allowed that the deal opened up the EMEA for Wyndham and added the prospects of a managementdriven revenue stream, but questioned how complementary the brand would be. “It is not as if Corinthia provided a missing piece for Wyndham since it does not have a U.S. presence,” says one source.

Dominique Bourdais, director, HVS International, London, questions some of the benefits, but acknowledges that the joint venture helps strengthen Corinthia’s brand against its better known international competitors. “I am not sure this adds value in Europe and North Africa as the Wyndham brand is not yet known here. Nevertheless, it gives Corinthia an opening toward the U.S.market,” he says.

Corinthia Towers, Prague.

From the dealmakers’ point of view, the deal is a win-win already. The fact that the Wyndham brand had been battered after years of being a prospective acquisition target did not put off Corinthia. Nor did Cendant’s acquisition and subsequent spin-off of Wyndham undercut the potential of the group’s reservation and marketing power, according to Pisani. “To evaluate the deal, you have to look at why we did it. As a management company, we acquired technical and technological support plus the reach of a global marketing organization,” Pisani says.

That should translate to maximized connectivity capable of driving top-line revenues, not only for its home markets but for new guest markets such as the United States. Aggressive sales and marketing efforts rolled out in the United States in 2005 pushed up overall room revenues from the U.S. travel market 70% within just 12 months. The ability to capitalize on Wyndham’s reach and capture, as well as its U.S. client base, should make the United States “our greatest growth opportunity over the next two to three years,” Pisani says.

Corinthia Nevskij Palace St. Petersburg.

A WIN-WIN

Corinthia’s regional profile did not reduce its appeal for Wyndham. “With the number of properties Corinthia has and its management capabilities, we were able to enter the EMEA market at the flip of a switch. This deal gives us immediate management company experience,” says Steven A. Rudnitsky, president and CEO of Wyndham Hotel Group. In fact, Rudnitsky says, Corinthia’s specialization in up-andcoming markets was a significant valueadd. “Corinthia is able to move quickly. It can get into markets such as St. Petersburg quickly because it has people who know how to do business in complex environments,” Rudnitsky adds.

Joint venturing a luxury brand has other kinds of upside, according to Rudnitsky. “One of the things that attracted us was the overall business proposition. The hotel industry is growing quickly in Europe, and the luxury and business classes are growing the fastest,” he says.

The deal also expands Corinthia’s horizons and provides immediate repositioning opportunities for its portfolios. By the end of this year, Corinthia will clarify its brand image by retaining its core brand on just its “top” seven properties—the six landmark hotels owned by IHI in Malta, Tripoli, St. Petersburg, Budapest, Prague and Lisbon and the seventh, also in Malta, which is privately held. The balance will be flagged as part of the Wyndham or Ramada Plaza categories. The Wyndham Grand Collection category is earmarked to serve as the reservation system that supports Corinthia-branded hotels.

Then there is the franchising piece. Franchising has been a hard sell for all but a few companies in Europe. Rudnitsky says that will change. “There is a real disparity between large and small chains. Asset holders are coming to see the advantage of being associated with a brand; they are seeing delivery against brand equity,” he says. Having Wyndham and Ramada Plaza on offer gives Corinthia entrée into different kinds of deals and different markets.

Having the ability to provide brands at various levels has opened new doors for Corinthia Hotels International, Pisani says. More challenges lie ahead. Near-term goals include closing management deals now in the works and mapping out the IPO. Beyond that, what happens depends on the market and the moment. “Every company goes through its own cycle. We have to decide what is best at each point,” he says.

Africa: The Long-Term Play Corinthia may have been a pioneer in Eastern Europe and Russia, but big brands and regional brands are vying aggressively for their share in these emerging markets. Africa is a clearer playing field—though its potential is not going unnoticed. Is it worth being a pioneer? Consultants say, yes, provided Corinthia is willing to be patient. Libya is a target for one or two more urban hotels and, at some point in the future, perhaps a resort on the Libyan coast. On the upside, the prospects for Libya are strong. All of the big oil companies, including U.S. firms, have a base there, says Dominique Bourdais, director, HVS International, London. Since oil exploration rights have been granted, “I would expect business to take off in five to 10 years once the precise location of the oil fields is established and oil refining facilities are brought up to 21st century standards,” he says. It also helps that the Libyan government “is eager to encourage economic growth and that entry into the country is relatively easy,” Bourdais adds. The downside, Bourdais says, is that “the years of blockade in Libya have taken their toll and the infrastructure is extremely poor. The economy looks weak because everything has to be rebuilt.” But there are business travelers— primarily French, Italian, German and North American— and there is wealth. It has yet to be converted to hard cash but, Bourdais says, watch this space in 10 to 20 years. Regarding resorts, Libya has the advantage of being a short flight from main European markets and offers unique historical, desert and beach experiences. However, Corinthia will have to fill some gaps. Bourdais calls tourism “negligible.” There is no tourism infrastructure and regulations prohibiting alcohol also pose some problems in resort marketing, says Bourdais. The Corinthia Bab Africa Hotel, Tripoli, Libya Expansion further into the continent could mean a higher risk/reward ratio. “Many cities in Africa need good, new, highquality hotels. Much of the existing stock is dilapidated,” says Trevor Ward, managing director, W Hospitality Group, Lagos, who adds that Libyan investors have been buying up assets in developing countries. Corinthia’s strong performance in its Tripoli hotel helps to open doors as does input from its non-executive board members such as Mustafa Khattabi, former general manager of the Participation Department of LAFICO, for which he managed and supervised investments, and former chairman of the Libyan Arab Africa Investment Co., with responsibility for investment in Africa. Local market knowledge is essential. As Ward points out, Africa has some difficult operating environments—from lack of trained staff to a harsh climate that translates to maintenance problems and “corruption at all levels.” But, at the same time, interest in Africa has never been greater. “Prospects for passenger traffic at Accra Airport are up 17%. Creating a brand people can trust will be very important in attracting the first-time traveler,” Ward says