Le Méridien Hotels
Case study
by Prof. Ian H. Giddy, New York University

What Actually Happened

London, 25 May 2001 - In a move to build an international hotel presence, Nomura's Principal Finance Group secured the leasehold interest in the 120-property Le Meridien group last week from Compass Group PLC in a deal valued at US$2.6 billion. Nomura was able to finance the acquisition without taking on debt through a 30-year sale/leaseback arrangement (with a 10-year extension) with the Royal Bank of Scotland. The bank led a group of investors in buying the hotel chain and paid the bulk -- US$2.1 billion -- of the purchase price. "Nomura got hold of the hotels without actually having to pay for them," said David Harper, associate director of Insignia Hotel Partners, who advised Royal Bank of Scotland.

The Japanese bank, known best in the United States for its past CMBS activity, has been on the hunt for hotels for most of this year. Nomura bought the 17-property Principal Hotels in February and Compass' Cumberland Hotel two months later. The most recent buy gives Nomura an additional 120 hotels, two of which are in the United States. Former Starwood executive Juergen Bartels will run the Le Meridien chain.

Bidding for the mostly European upscale hotel chain was competitive; one interested party, Marriott International Inc., bowed out in the final weeks of the bidding process. It is Nomura's "intention to make Meridien the best hotel chain in the world," said a Nomura spokesperson. Nomura believes that by installing management solely devoted to hotel opportunities, the quality and value will be increased.

According to Nomura, the equity was provided by Nomura International plc's Principal Finance Group (£227 million), Royal Bank Private Equity, the private equity arm of The Royal Bank of Scotland (£100 million), Alchemy Investment Plan (£35 million), Abbey National Treasury Services (£15 million) and Juergen Bartels (£10 million). The largest part of the financing was a £1.25 billion sale and leaseback agreement with The Royal Bank of Scotland with the balance being a mixture of senior debt being provided by CIBC World Markets and Merrill Lynch and mezzanine finance from Lehman Brothers. Additional facilities of £110 million to support capex and other commitments were provided by CIBC World Markets and Merrill Lynch. CIBC World Markets and Merrill Lynch also acted as financial advisers to the purchaser.

Analysts said Mr Bartels’s financial stake in the deal was a “punchy commitment” and an unexpected twist to the deal. Unlike most of PFG’s deals, this latest has seen Nomura rely on rival private equity houses to help with finance.

Financing from CIBC and Merrill included the following:
- senior debt in the form of a 3-year bridge loan of GBP 750 m, priced at 225 bp. The reason for this bridge (3 years judged unusual on this market), was that they were hoping to securitize much more of the assets in the coming months. In retrospect, analysis thought that this would be difficult to achieve. It was believed that Mr Hands intended to securitize the income from some of the hotels that were held on management contracts.
- revolving credit facility: GBP25m priced at 225 bp.
- capex facility: GBP110m for 250 bp.
- mezzanine from CIBC and Merrill, at 600bp.

The deal included a GBP160m "payment-in-kind" mezzanine tranche arranged by Lehman Brothers, chosen instead of asset-backed financing.. Nomura has made its name (and a fair chunk of its profits) by issuing bonds backed by the income flows from its assets. Hotels would appear to be easily securitizable assets, but the cost of redeeming these bonds early and achieving a rapid realization of the assets made mezzanine a more attractive option in this instance. The  Lehman PIK paid 16.5% for the 1st year, 17.5% for the 2nd year, and 18.5% for the 3rd year.

The Royal Bank of Scotland purchased 12 hotels from Meridien for approximately £1.25 billion including a capital expenditure facility of £250 million. These hotels were simultaneously leased back to Meridien. Lease payments were linked to the hotels' turnover.

This was the second big investment Royal Bank of Scotland has made in the hotels sector in 2001, having spent £312 million buying 11 Hilton hotels to lease back to the hotel operator. Iain Robertson, Chief Executive, Corporate Banking and Financial Markets, commented: "This innovative deal is part of our strategy to invest in high quality assets within the hotel sector and across other industries which provide an attractive running yield as well as the opportunity for capital growth. The combination of our sector knowledge, underwriting capacity, specialist property financing skills and private equity expertise, coupled with the high quality of the hotels we have purchased from Le Meridien, makes this an attractive investment that fits very well with our aims."

Mezzanine finance is set to take an increasing role in the new funds being established by Guy Hands. In a recent interview he said: “I am not sure whether what we gave up in flexibility [by using asset bonds] was worth what we gained financially. I think we'll be using as much bank finance as securitization going forward.” 

Back to the Case Study

Go to Giddy's Web Portal • Contact Ian Giddy at ian.giddy@nyu.edu