Finance Ministry justifies divestiture of Hyatt and Hilton

The Ministry of Finance and Mass Media has issued a press release, justifying the decision to divest Hilton and Hyatt hotels.

The partially completed Hyatt Hotel has so far cost over Rs 15 billion to many state and non-state organizations and people including the Employees Provident Fund, Sri Lanka Insurance and Litro Gas.

Hence, the Ministry has decided to divest the Hyatt hotel to a reputable investor with the financial potency to complete the hotel ‘without this being a burden to the state’.

The Ministry of Finance and Mass Media says that the Hilton Hotel needs to upgrade its hotel rooms ‘to reach its full potential’ in order to compete with the newer hotels.

Meanwhile, the Lazard Asia of Singapore and MTI Consulting of Sri Lanka, which possess experience in divesting hotels, have been selected as financial advisers, with the approval of the Cabinet, for the sale of the two state-owned hotels.

The complete press release issued by the ministry is as follows:

“The decision to divest Hilton and Hyatt hotels, which are non-strategic holdings of the Government, was decided by the Cabinet of Ministers and proposed in several budget speeches.

Hyatt Hotel, which is partially completed, has so far cost the Employees Provident Fund, Sri Lanka Insurance and Litro gas, all state-owned organizations and accountable to the people, over Rs 15 billion. Furthermore, these same state organizations would have to put more money and give guarantees to banks for a much higher amount to complete the hotel. Public money especially that of the EPF should not be spent on building hotels where the returns on investment can take many years. Therefore, the Hyatt Hotel has to be divested to a reputable investor with the financial strength to complete the hotel without this being a burden to the state.

The Hilton Hotel, which has been profitable, needs to upgrade the hotel rooms to reach its full potential and compete with newer hotels, which had not been done for 30 years. The cost of refurbishment is expected to cost over Rs 4 billion. Also, this hotel has a foundation built for an additional hotel tower and 2 acres of land on which new investment in commercial property or serviced apartments can take place. As a government owned enterprise, the hotel does not have the financial strength to undertake these new investments and if it does, the government will have to fund this or expensive loans have to be taken. Therefore, it is justified to divest this hotel to a financially strong investor who can proceed with these new investments and generate more employment opportunities.

Importantly, the Treasury, EPF, Insurance Corporation and Litro Gas can put the money received from the divestiture to better use for the benefit of the public. In addition, the government is committed to give a number of shares in the Hilton Hotel to its employees on a scheme to be finalized and advised in due course. Therefore it is in the best interest of all stakeholders and the country’s economy to attract new foreign and local private investments into these assets.

On the divestiture process, the government is following a transparent mechanism. First, since this is an investment, it is required that investors are provided with a detailed information memorandum that would enable them to carry out a due diligence and investment appraisal. Therefore, the government decided to appoint an independent financial adviser, with offices globally widespread, who has experience in divesting hotel assets. Via a cabinet appointed consultancy procurement committee, after issuing a RFP, Lazard Asia of Singapore and MTI Consulting of Sri Lanka were selected as financial advisers with the approval of the Cabinet. They were selected out of 16 international, local and foreign financial advisory firms who responded.

Then a Cabinet-appointed Negotiating Committee will overlook the divestiture process with the assistance of the financial advisers and National Agency for Public Private Partnership. The first step in the process is to call for expressions of interest. This is only for the purpose of identifying who the bidding party is. Via the EOI advertisement placed, interested parties have to indicate their business, financial strength and which hotel asset they have an interest in purchasing. When they contact the financial advisers, the investors will be sent a simple one page format to fill out the basic information about themselves and information on the hotels that is non-confidential. If the investors need more time to respond to the one page format, they can request for this. Therefore, the expression of interest does NOT require a priced bid.

Meanwhile, Lazard and MTI, through their global offices, have already begun to reach out to international real estate investors covering many countries.

Why this is being done this way is that both hotels are governed by management agreements with Hilton and Hyatt international hotel management companies and these agreements have confidentiality clauses, which restricts the hotel-owning companies from releasing sensitive commercial information.

It is for this reason that parties who express interest will be first shortlisted and then bound to sign a Non-Disclosure and Confidentiality Agreement. Only after this is signed, the interested investors (not brokers) will be given more than 100 pages of detailed financial and other information, and given access to a security controlled data room. It is after this that the transparent bidding process will start under supervision of the relevant Cabinet-appointed committee, where prospective investors will have ample time over several months to prepare financial bids and bid conditions.”