The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The potential rebirth of Grand Bahama’s hotel product moved a step closer yesterday as the 409-acre Grand Lucayan resort was placed on the auction block, an adviser saying: “It’s the right time and place to come to market.”

Mike Sullivan, a director of HVS Capital Corporation, which is advising on and managing the sales process for the 1,271-room complex’s owner, told Tribune Business that its break-up into different parts would be entertained.

Suggesting that Cheung Kong Property Holdings (the real estate division for Hutchison Whampoa) had “not been interested” in such an exit route previously, Mr Sullivan said placing the Grand Lucayan’s resort, casino and other assets into the hands of different buyers could unlock greater value for all parties.

He emphasised that through the sealed bid auction process, HVS would seek “top flight, world class operators for all components” of the Grand Lucayan, while acknowledging that other investors would seek to acquire the entire property and retain its ‘mega resort’ characteristics.

Mr Sullivan, though, acknowledged that the Grand Lucayan’s sustained losses since its opening, estimated at between $10-$20 million per year by the Government’s consultants, “doesn’t help” the buyer search.

He added, though, that this could be countered by finding the right purchase/operator with the vision to deliver “what this asset could be’.

“It’s a lot of work, frankly, to think about selling parts of the resort, and to-date Hutchison hasn’t been interested,” Mr Sullivan told Tribune Business.

“The new way is that parts of the resort can be purchased individually, and that improves value, as you’re not forcing an investor to buy something they’re not interested in.

“What we want is top-flight, best of class operators in all components of this resort. It would be best for Hutchison, in terms of price, best for the resort, and best for the Bahamas and Grand Bahama in general.”

Mr Sullivan said the ‘sealed bid auction’ process was designed to provide flexibility for both buyers and seller, as it would allow the former to perform their own due diligence on the property, and develop a “value assessment”.

“We believe there are a number of investment opportunities for interested buyers, whether they’re interested in purchasing the entire resort or looking an individual components,” Mr Sullivan added.

“We also believe there will be a significant number of bidders who will want the whole thing.”

An HVS statement yesterday suggested that Cheung Kong would prefer a single buyer acquiring the whole property. It added that no reserve price had been set, meaning that Cheung Kong will not indicate a minimum price it is seeking.

Mr Sullivan pledged that HVS would take a “more systematic” approach to finding potential Grand Lucayan purchasers. He promised that it would pitch the property to the world’s top 20 casino owners, operators and managers, and their counterparts in the all-inclusive resort industry.

“There’s potential to create a first class casino experience there,” Mr Sullivan said, noting that the ‘win drop’ between 2006-2008 was towards the high end of global casino industry averages.

“One of our hoped for goals is to introduce the casino piece to a first class operator, as it adds ambience to the resort in general, and is profitable,” he added.

“All-inclusive is the hottest trend in hotels in the Caribbean. It’s been going on for several years. There are a significant number of all-inclusive owners, operators and managers that will be contacted for this asset.”

The 522-room Memories Beach Resort has already been leased to Sunwing as an all-inclusive model, and Hutchison Whampoa has just invested $6 million to do the same at the 198-room Lighthouse Pointe.

Mr Sullivan promised an “aggressive international advertising campaign”, with the Grand Lucayan resort set to be marketed to prospective purchasers via advertisements in the Wall Street Journal, Financial Times, Toronto Globe and Mail and resort industry trade press.

“I think it’s the right time and right place to be coming to market with a property like this,” he told Tribune Business, pointing to the Caribbean’s US proximity and perception as a relatively safe destination.

“The bids are due on June 10. Depending on what we have in hand at that point, the goal is to close the transaction fairly soon thereafter. We don’t anticipate this being a long, drawn-out process. The Caribbean is firing on all cylinders right now, and it’s a great time for someone to step in quickly.”

Mr Sullivan described Hutchison Whampoa’s offer to provide ‘appropriate buyers’ with financing for their purchase as “a big deal”, given the ongoing difficulties in accessing debt for resort purchases.

He also disclosed that HVS hoped to capitalise on recent investor attention that had been drawn to the Bahamas by the stalled $3.5 billion Baha Mar development.

While the Grand Lucayan is smaller than that project, Mr Sullivan said that in contrast to Baha Mr, which appears destined for a long work-out, the Freeport-based resort could be purchased relatively quickly.

“A lot of people have expressed interest in the Bahamas due in part to Baha Mar,” Mr Sullivan said. “The end game on that one is harder to define. The end game on this one is rather quicker, and has a beginning, middle and end.”

Tribune Business previously revealed that Memories has been interested in acquiring the Grand Lucayan, but the gulf on price between itself and Cheung Kong is thought to be considerable.

This newspaper understands that Memories has offered around $95 million, while Hutchison Whampoa/ Cheung Kong is seeking somewhere close to $220 million.

There have also been suggestions that Mediterranean Shipping Company (MSC) is interested in acquiring the Grand Lucayan as part of a cruise home port strategy, although the company is thought reluctant to entertain any new ventures until the uncertainty surrounding the Hawksbill Creek Agreement and its expiring incentives is removed.

Several Freeport-based sources, speaking on condition of anonymity, yesterday suggested that the ‘sealed bid auction’ might be a tactic to determine whether better offers exist, or to force Memories and MSC to raise any bids they have made.

“Those are important investors, obviously, no question about it,” Mr Sullivan said of MSC and Memories. “They will be treated accordingly, no question about it.

“We are keenly aware of the importance of this asset to Grand Bahama and the Bahamas in general. We aim to not only do a service to our client, but the Bahamas in general, and Grand Bahama specifically.”

He added that the Christie administration was aware of the ‘sealed bid auction’ move, and “has expressed great support in seeing this asset transact appropriately”.

‘Sip sip’ that Hutchison Whampoa/Cheung Kong was set to make a move at the Grand Lucayan, and seek an exit route, has been widespread for weeks.

Tribune Business had heard different variations on how this was going to be achieved, and the ‘sealed bid auction’ method was likely selected because if offers the best prospects for maximising the Grand Lucayan’s sales price - Cheung Kong’s primary concern.

Hutchison/ Cheung Kong’s decision to sell now is also unlikely to be coincidental, given the Government’s desire to get new ownership/management for the Grand Lucayan that can revive both the property and the island’s tourism industry.

Among the 12 recommendations of the Hawksbill Creek Review Agreement committee was for the Government and Grand Bahama Port Authority (GBPA) “to secure suitable partners and arrangements which would secure the economic viability of Hutchison’s hotels, casino and tourism assets, and curtail unsustainable losses and large Government subsidies”.

It is unclear whether the uncertainty surrounding the Government’s immediate and long-term plans for the Hawksbill Creek Agreement will act as an obstacle to any Grand Lucayan sale, although the website offering information to potential buyers says the matter will be resolved soon.

McKinsey, in its late 2014 report on the options for Freeport’s growth, said the Government was seeking a “better owner” for the Grand Lucayan resort. It suggested Hutchison Whampoa may be prepared to sell for less than $180 million.

The report added that Grand Bahama’s hotel product might improve if the Hong Kong conglomerate sold the property to an entity with Caribbean tourism experience.

McKinsey said 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.”

Suggesting that the Grand Lucayan needed an owner with Caribbean hotel operating experience, the McKinsey report said: “Book value is likely high ($180 million plus), but the present value (PV) to Hutchison of avoiding operating losses is worth $115-$230 million.

“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).

Given the Grand Lucayan’s struggles, few on Grand Bahama are likely to be opposed to Hutchison Whampoa’s exit.