The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is seeking a “better owner” for Freeport’s Grand Lucayan resort, with its international advisers suggesting Hutchison Whampoa may be prepared to sell for less than $180 million.

McKinsey, in its recently-disclosed report on the Government’s options for Freeport’s future economic growth, said Grand Bahama’s hotel product might improve if the Hong Kong conglomerate sold the property to an entity with Caribbean tourism experience.

It added that the Grand Lucayan had incurred consistent operating losses of between $10-$20 million per year since opening in 2001, while Hutchison Whampoa’s interest in the property - and effecting a turnaround - “appears limited”.

Pointing out that the Grand Lucayan’s occupancies (pre-Memories at least) averaged around 49 per cent, compared to an industry average of 75 per cent, McKinsey said: “The owner’s interest appears limited.

“Interviews suggest a lack of operational expertise and insufficient maintenance. Hutchison owns other hotels in Asia, but they are high-end business properties, not resorts. It did not come to Grand Bahama for the hotel.”

Detailing the consequences for Grand Bahama’s overall tourism and hotel product, given that the Grand Lucayan is the largest resort property, McKinsey’s report said: “The largest hotel is owned by Hutchison, which does not appear to have broader ambitions for developing tourism on the island, notably when faced with challenges of expensive airlift and lack of critical mass of other hotels, restaurants and activities on the island.”

The report, which is likely to have been a major influence on the Christie administration’s approach to Freeport’s soon-to-expire investment incentives, reveals that the Government had three objectives in consulting with Grand Bahama stakeholders.

One is to “secure better owners for tourism assets” in Freeport, with the goal of “unlocking the potential for ambitious multi-year investment in the tourism sector” and eliminating barriers to further developments - particularly another cruise port.

The latter issue was discussed when Prime Minister Perry Christie and his delegation met with Hutchison Whampoa executives in London in December, with the Government wanting the Hong Kong-based conglomerate to waive the Freeport Harbour Company’s cruise port exclusivity on Grand Bahama.

The outcome on this issue is still unclear, but such a waiver is essential to facilitate Carnival Cruise Lines’ planned cruise port in eastern Grand Bahama.

It is also uncertain whether the Government engaged Hutchison Whampoa over a possible exit route from the Grand Lucayan, as Obie Wilchcombe, minster of tourism, referred to the hotel only briefly in his House of Assembly report on the talks.

However, the McKinsey report, in providing something of a ‘blueprint’ for how the Government should negotiate with Hutchison Whampoa over Freeport’s expiring tax breaks, said: “Grand Bahama’s hotel product could improve if Hutchison divested Grand Lucayan to an owner with Caribbean resort marketing/operation expertise.”

The international consultancy said the threat of real property tax and Business Licence fees being imposed on the Grand Lucayan did not create “major leverage” for the Government by itself.

The resort would only pay around $250,000 in Business Licence fees per annum, according to McKinsey’s calculations, while a $2-$3 million real property tax bill could potentially be slashed to as little as $15,000 a year by the incentives available under the Hotels Encouragement Act.

However, McKinsey said the cumulative tax burden that could be incurred by Hutchison Whampoa’s collective Grand Bahama assets - particularly the Grand Bahama Development Company (DevCo) - “could open the way for the Government to negotiate a fair price” over the Grand Lucayan.

“Book value is likely high ($180 million plus), but the present value (PV) to Hutchison of avoiding operating losses is worth $115-$230 million,” McKinsey said.

“Thus, management may consider a deal less than $180 million..... Outside-inside analysis suggests there is a bargaining zone for Government and Hutchison to strike a deal. Furthermore, the hotel’s annual operating loss is reducing Hutchison’s enterprise value by $87-$170 million.”

McKinsey added that it derived the $115-$230 million potential savings for Hutchison Whampoa by dividing the Grand Lucayan’s current $10-$20 million per year losses by its owner’s estimated 8.6 per cent weighted average cost of capital (WACC).

The report warned, though, that getting a new owner for the Grand Lucayan was not without difficulties or risk to all involved, including Grand Bahama and its economy.

Apart from finding a new owner/operator with sufficient expertise and knowledge of the Bahamian tourism market, McKinsey added that any sales price needed to satisfy both sides.

“The price must adequately reflect current operating losses for the Government/partner to realise a profit,” the report said. “Price must be acceptable to Hutchison, which is reluctant to book a loss on the disposal.”

For a Grand Lucayan turnaround to succeed, McKinsey warned that investment in supporting infrastructure such as airlift was vital. It added: “A high-profile failure could generate negative publicity and further depress investment.”