Property loan stock company Hospitality Property Fund yesterday announced its intention to acquire the entire issued share capital of hotel group City Lodge.

The transaction would mean that Hospitality would issue City Lodge shareholders Hospitality A- and B-linked units with a value equal to R60 per City Lodge share.

City Lodge has a market capitalisation of R2,4bn.

City Lodge founder and non-executive director Hans Enderle (pictured) said he thought the offer was a good one.

Hospitality, which is listed on the financial real estate sector of the JSE, said the offer was in line with the international trend in the hotel and leisure industry for hotel companies to separate the ownership of hotel properties from their operations.

This enables hotel management to focus on the running of hotels, while a property management company deals with ownership issues relating to the hotel properties. Enderle said the transaction would allow the company to "separate the brains and the bricks of the business, a common practice globally and in the South African industry".

After the implementation of the acquisition, Hospitality said it would sell the City Lodge hotel operating business, including its movable assets, staff and brand names, to a separate operating company. The operating company would then enter into a 15-year initial lease for the City Lodge hotel properties with Hospitality, with an option to renew for an additional 15 years.

Hospitality said the lease would contain a high fixed-rental component and would provide a secure cash flow for the company.

The newly formed operating company would be 100% held by a consortium comprised of Enderle and the hotel's management and staff.

City Lodge said in a cautionary statement that an independent sub-committee of the board had been formed to assess the potential transaction.

Hospitality said the purchase would provide it with substantial fixed-lease income, exposure to growth in hotel revenue and further diversification in terms of geographic location, hotel grading and lease expiry.

Its offer would be at a premium to the current City Lodge share price. The R60 per City Lodge share offer equates to a premium of 10% on the share's closing price of R54,50 last Friday.

Hospitality said the intended transaction would be subject to the approval of its board and the competition authorities.

A due diligence investigation in respect of City Lodge and its assets would also have to be completed.

Shares in City Lodge climbed 5,07%, to equal their R58,50, 12-month high in afternoon trade and closed at R58,31.

Business Day
Publisher: I-Net Bridge
Source: I-Net Bridge