The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Baha Mar’s current owner leapfrogged all rival bidders in less than two weeks to become the property’s chosen buyer despite its $1.3bn offer coming from outside the formal sales process.

Documents previously kept from public view reveal the breathtaking speed at which Chow Tai Fook Enterprises (CTFE) seemingly emerged from nowhere to become the Cable Beach mega resort’s purchaser following Sarkis Izmirlian’s failed Chapter 11 bankruptcy protection bid in 2015.

Tribune Business can reveal that the privately-owned Hong Kong conglomerate, which is controlled by the billionaire Cheng family, had agreed a “Heads of Terms” with the former Christie administration less than a fortnight after its second “indicative” offer was submitted to Baha Mar’s receivers on August 2, 2016.

The “Heads of Terms”, which set out the key points of the commercial agreements between CTFE and the Bahamian government, were “agreed” during the week that began on August 15, 2016, and provided investment incentives and concessions “for the proposed purchaser and only the proposed purchaser”.

And this newspaper can also disclose that CTFE leapt to the front of the buyer queue despite its two offers being “lower than the value” offered by the preferred bidder to emerge from the receivers’ formal sales process, rival Hong Kong casino, leisure and entertainment conglomerate, Melco International Development.

Melco, which is chaired by Lawrence Ho, submitted a $1.45bn first-round offer before coming up with the “highest net present value” bid of between $1.474bn to $1.636bn in the second. Baha Mar’s receivers, who began negotiations for a deal with Melco on June 3, 2016, ultimately abandoned these talks on August 9 without explaining why before informing the government one day later.

Yet, just five days to one week later, the Christie administration had agreed a Heads of Terms with CTFE even though its first “non-binding” offer was only submitted to the receivers on June 28, 2016 - almost two months after the first round of bids were received, and following the closure of the stage in which Melco was selected as preferred bidder.

The revelations are contained in an affidavit by then-Deloitte & Touche (Bahamas) managing partner, Raymond Winder, who was one of three receivers appointed by Baha Mar’s financier, the state-owned China Export-Import Bank.

The affidavit, which was sealed by the Supreme Court to “protect the integrity of the sales process” when it was filed in late August 2016, contains previously unknown details as to how that played out and the identities of all the bidders who sought to buy the mega resort following Mr Izmirlian’s ousting as its principal developer.

It was finally exposed this week in filings with the New York State Supreme Court by China Construction America (CCA), Baha Mar’s main contractor, as part of its battle with Mr Izmirlian over the latter’s $2.5bn “fraud and breach of contract” claim against it.

While the disclosures will have little impact on Baha Mar’s present and future, they raise numerous questions as to how CTFE was so rapidly selected as the buyer since it never participated in the formal sales process.

A Tribune Business article from April 15, 2016, quotes Mr Winder as saying the receivers cannot negotiate with Mr Izmirlian over Baha Mar’s sale because all offers have to come through that process - the very same process that CTFE was able to ignore and not participate in.

And its second offer was also lower than the $1.48bn “price” at which Baha Mar’s resort, property and other fixed assets were sold out of receivership to a special purpose vehicle (SPV) owned by the China Export-Import Bank in preparation for the project’s construction completion and onward sale to CTFE.

Mr Winder, detailing CTFE’s emergence, said: “ On June 28, 2016, after the end of the second round of the sale process the joint receiver-managers received a non-binding indicative offer from Chow Tai Fook Enterprises for acquiring 100 percent equity interest in the project at a consideration of up to $1.4 billion subject to due diligence results.

“ On August 2, 2016, Chow Tai Fook further improved its indicative offer for acquiring 90 percent equity interest in the project at a consideration of up to $1.3bn. The joint receiver-managers have evaluated the terms of the first letter and the second letter, and concluded that the non-binding indicative offers would not be selected for further discussion at this stage of the sale process as its value was lower than the value of the second offer from Melco.”

That stance would soon change, and Mr Winder’s affidavit gives no explanation as to why the attitude towards CTFE’s proposals suddenly altered within a matter of weeks other than to reference discussions between the Hong Kong conglomerate and the China Export-Import Bank.

“Based on the second letter, the offer proposed by the proposed purchaser [CTFE] was still lower than the proposed price at which the assets are to be transferred to the.. SPV,” the now-Commonwealth Bank president said. “We understand that further discussion is taking place between China Export-Import Bank and the proposed purchaser.”

This indicates that Baha Mar’s $2.5bn financier was seeking to increase CTFE’s purchase price, given that all offers received had then been at least $1bn below its total exposure to the mega resort project. It also suggests that CTFE’s interest may have resulted from prodding by the Beijing government through the China Export-Import Bank.

Mr Winder then admitted that CTFE was “not a purchaser who participated in the bidding process”, yet it had “been introduced to the Government of The Bahamas” seemingly within days of its second offer and the failed negotiations with Melco.

“Following the submission of the second offer by Melco on June 3, 2016, the joint receiver-managers engaged in negotiations with Melco and their advisers, together with the representatives of China Export-Import Bank and its advisors on the terms of the transaction,” he revealed.

“After several rounds of discussions between the parties, no agreement was reached on certain material terms of the proposed acquisition by Melco of the project assets.... Despite further attempts to finalise the terms of a sale, no agreement was reached.

“Accordingly on August 9, 2016, the joint receiver-managers notified Melco that we would not be considering Melco’s proposal further. On 10 August, the joint receiver-managers informed the Government of the Bahamas regarding our decision on the second offer of Melco.”

Enter CTFE just days later. “The proposed purchaser has been introduced to the Government of The Bahamas,” Mr Winder said. “During the week of August 15, 2016, the Government of The Bahamas have agreed a Heads of Terms which in fact provides concessions for the proposed purchaser and only the proposed purchaser.”

The speed with which this was done appears remarkable, especially given the amount of due diligence any buyer would wish to undertake on a resort asset as complex and sizeable of Baha Mar - which was then in receivership. CTFE also seemingly never accessed the “data room” established by the receivers for the formal sales process.

To prepare for the sales process, Mr Winder said the Deloitte & Touche receivers obtained two valuation reports on Baha Mar from FTI Consulting and CBRE Hotels Valuation & Advisory Services.

FTI Consulting determined that the “as is” worth of Baha Mar, as an incomplete resort project, was $503.5m as at April 1, 2016. It forecast that this would rise to $1.117bn upon completion, and hit $1.494bn at April 1, 2021. CBRE, meanwhile, pegged the development’s “as is” worth at $641.38m, and “completion” and “stabilised” values at $1.006bn and $1.111bn, respectively.  

Mr Winder’s affidavit identified 17 parties who signed non-disclosure agreements (NDAs) to participate in the formal sales process, and from these came five firm bids. Among those who signed NDAs but did not submit offers were Starwood Capital Group, Och-Ziff Real Estate Acquisitions, Westmont International Development, and Langham Hotels Investments.

One singled out for special attention was Blackstone Real Estate Advisers, the property-focused private equity firm that acquired 22 public real estate firms for $128bn. Its portfolio also gave it experience in running hotels and resorts.

While Blackstone never submitted a formal offer, it expressed an interest in talking with the receivers and continuing its due diligence. “Blackstone verbally informed the joint receiver-managers that they considered that the Bahamian tourist market would not grow easily to absorb the new 2,300 rooms to be offered by the project and the new casino - especially with competition arising from Cuba and the relaxation of granting of gaming licenses in the United States,” Mr Winder said.

The five first round bids came from Melco; Hong Kong HNA Holding Group; Fosun, owner of the Club Med chain; Baupost Capital; and Centerbridge Credit Advisers.

Melco, a Hong Kong-listed company with operations in Macau, the Philippines, Cambodia and Russia, submitted a $1.5bn opening bid featuring a mixture of $1.3bn in cash and $150m of convertible notes to be issued to China Export-Import Bank.

“Melco and its partner Zhongzbi Enterprises Group (ZEG) budgeted a further $250 million to fund pre-opening expenses and working capital for the project,” Mr Winder said. “The proposal explained that the total cash amount of $1.55bn ($1.7bn less the $150m in new convertible notes) could be fully available immediately and no outside financing would be required.”

HNA Group, a Fortune 500 company featuring an aviation, tourism and hospitality group that operates 500 hotels with 90,000 rooms, teamed with Tavistock Group - the Albany developer headed by Lyford Cay-based billionaire, Joe Lewis, on a $1.2bn proposal that featured $400m on cash. The purchase price was $800m, with the remainder based on what it would take to complete Baha Mar’s construction.

Fosun, meanwhile, offered $1.88bn based on Baha Mar’s completion costs, but Mr Winder said this was “not attractive” due to the low amount of cash involved and dependence on China Export-Import Bank for financing it had never agreed to provide.

The offers from Baupost Capital and Centerbridge Credit Advisers, the latter of which has participated in Atlantis financings, joined Fosun in being rejected by the receivers at the end of the first bidding round.

Only Melco and HNA Group/Tavistock Group qualified for the second round, during which the former was selected as preferred bidder until CTFE’s appearance.