For many, the Orient Express brings to mind the Agatha Christie Novel. Since 1982, however, it's been a part of Orient-Express Hotels (NYSE:OEH), a global luxury hotel and adventure travel operator. In October, Tata Group's Indian Hotels division offered $12.63 a share for the company. It rejected the offer Nov. 8 saying the price was much too low and that the current market for luxury hotels makes it a bad time to maximize shareholder value. Hiring John Scott as CEO on the same day it passed on Tata's overtures suggests it wants to go it alone - at least for now. Its stock dropped more than 10% on the news providing investors with a sudden buying opportunity.
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Orient-Express Hotels has definitely had better moments since becoming a public company in August 2000. Priced at $19 a share, its stock hit an all-time high of $65.36 on Oct. 18, 2007. Its revenues that year were $578 million with net earnings of $33.6 million. Then its business hit the skids and over the next four years it cumulatively lost $245 million with $132 million in non-cash impairment charges. Like every business in late 2008, its stock took a drubbing, losing 86% of its value. Former CEO Paul White took the company through four difficult years before resigning in July 2011. Although the search for a new CEO took 15 months, it appears that the wait was worth it. John Scott comes to the job after eight years as CEO of Rosewood Hotels, a luxury hotel management company with 17 premium properties including the Carlyle in New York and The Mansion on Turtle Creek in Dallas. Prior to running the management company, Scott spent seven years with Maritz, Wolff & Co., where he was responsible for acquisitions and asset management for the private equity real estate investment group. Rosewood has a reputation for service that's on par with Marriott's (NYSE:MAR) Ritz Carlton brand. Scott brings the perfect combination of operational and financial experience. Better days appear ahead.
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Value of Properties
In its rejection letter to Krishna Kumar, Vice Chairman of Indian Hotels, OEH Chairman Robert Lovejoy mentions a very important factor in its decision: "The market value of our unique properties is underscored by the prices per key paid in some recent sales of iconic assets." For instance, Morgans Hotel Group (Nasdaq:MHGC) has apparently put its Delano property in Miami Beach up for sale at $1 million per key. The U.S. hotel market is expected to see $14 billion in transactions in 2012, considered by many to be a mediocre year by historical standards. The average transaction value involving luxury properties in 2012, however, is $471,000 per key and $628,000 in New York. Over in Singapore, the 240-room Hotel Grand Pacific was recently sold for $850,000 per key. For argument's sake let's assume the worldwide average for luxury transactions is the same as the U.S. number. What does that mean for Orient-Express Hotels?
OEH owned 2,957 hotel rooms as of the end of 2011. At $471,000 per key, its hotels would be valued at $1.4 billion, $200 million higher than Indian Hotels' rejected offer. Of course the number it would ultimately get for each of those hotels could be higher if the economy improves, but that's a knife that cuts both ways. The other thing to take into consideration is the fact that this valuation doesn't take its trains and cruises business into account; this business could probably fetch another $200-250 million based on 10 times EBITDA. Also, it's important to remember that at its stock's highest point it had a market cap of $3.5 billion for a business with $578 million revenue and $33.6 million in net income. Analysts estimate that its revenues in 2012 will be $578 million with net income of $9.0 million. The revenue is identical to 2007 and the net income is a little more than one-fourth the total from five years ago. There's really not that much difference. Either Orient-Express was way overvalued back then or it is somewhat undervalued today. I suspect it's the latter.
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The Bottom Line
Former CEO Paul White teamed up with Tata to make its bid for Orient-Express. It seems almost traitorous to leave for personal reasons and then re-emerge a year later as part of a group to buy back your old firm. Shareholders should be thankful that he's gone because empire building is not the job of the CEO. With this M&A nastiness behind it, newly-appointed CEO John Scott has a big job to do. If his last gig is any indication, he's more than up to the task. In the meantime, Orient-Express Hotels has gone on sale.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.