Fundamentals of Private Equity and Venture Capital - PEI Media

preceded the private equity hotel craze by a
good seven years.
In a transaction valued at more than $980 million,
the private equity groups acquired the
hotel portfolio from a 100-year-old publicly
held company that was controlled by a family
trust. Once the dust settled, Blackstone and
Colony had a clutch of luxury UK lodging
assets: The Savoy, Claridge’s, The Berkeley and
The Connaught. In addition to owning four of
the seven “superluxury” hotels in London, the
investor group walked away with The Lygon
Arms, a country-house hotel in the Cotswolds
region, and the quintessentially English restaurant
Simpson’s-in-the-Strand.
In the buyer’s minds, the benefits of the transaction
were threefold. The firms held a majority
of London’s 1,250 luxury hotel rooms. In
addition, the hotels had recently seen a number
of capital improvements that, according to
Blackstone, had affected annual numbers
without being seen in operating performance.
Finally, the investors saw a number of opportunities
to create value in the assets: During
their ownership, Colony and Blackstone added
additional rooms, contemporary lounges and
high-class restaurants; divested themselves of
non-core assets like staff lodging and the
Savoy Group laundry business; and sold off
the Lygon Arms property in June 2003 to pay
down debt.
The investor group rode out the storm that hit
the hotel market at the beginning of the
decade: the foot-and-mouth crisis in the UK; a
business downturn in the US; the terrorist
attacks of September 11, 2001; SARS; and
armed conflict in the Middle East. While it no
doubt affected the bottom line, the investors
held onto the properties long enough to experience
some upside from the revitalisation of the
market. In May 2004, the Savoy Group was
sold to an investor group led by Dublin-based
Quinlan Private for £750 million, approximately
a 1.8x return on investment.
Colony and Blackstone have continued to make
hotels an important part of their investment
strategies – and made European property takeprivates
an important part of everyone else’s.
A gamble on Harvey’s
1999
When Colony Capital spent $1.2 billion to buy
an additional four gambling parlours from
Harrah’s and Caesar’s last April, the firm
became the proud owner of the largest privately
held casino company. Although those investments
have had a shaky first year, there is no
denying Colony’s strength in the gaming sector.
All of this was set in motion by one purchase:
the firm’s 1999 acquisition of Harvey’s Casino
Resorts in Lake Tahoe for $405 million. The
firm later sold the company, which also owns
hotels and casinos in Iowa, to Harrah’s for $625
million two years later.
“When Colony bought Harvey’s, we saw an
industry with only big, strategic players and no
one to sell to except each other,” Colony chief
executive officer Tom Barrack told sister publication
Private Equity International last year.
“We thought we could act as a liaison to all
these larger companies. Now, the consolidation
in the industry has been great fuel for our
acquisition program.”
Today Colony is one of the few private equity
firms licensed in US gaming – Barrack has
referred to the licensing process as a Bataan
death march – and its acquisitions have included
the Las Vegas Hilton and the Resorts company.
Earlier this year, the firm joined a consortium of
investors including Goldman Sachs and
Providence Equity Partners in acquiring Kerzner
International, the owner of the Mohegan Sun
Casino in Connecticut and the Atlantis Resort in
the Bahamas, for $3.6 billion. With deregulation
occurring across the country and more and
more US states legalizing some form of gambling,
the gaming sector is big business these
days and Colony is one of its biggest players. The
firm is even looking overseas: In conjunction
with the Las Vegas Sands, Colony portfolio company
Fairmont Hotels is planning to develop a
new resort in Far East gaming mecca Macau.
The monolithic Time Warner Center
2000
Colony’s first casino acquisition launches
an empire
Apollo and The Related Companies fix up a
blighted Columbus Circle
When construction started on the Time Warner
22 THE FUNDAMENTALS OF PRIVATE EQUITY
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