What a difference two years makes for hotel group Dalata

Irish hotel group Dalata published stellar interim results yesterday to maintain its strong momentum since raising €256 million net of expenses in an initial public offering (IPO) in March. Revenues rose 31 per cent in the first six months of the year while its ebitda (earnings before interest, tax, depreciation and amortisation) more than doubled to €2.4 million. It is forecasting ebitda for the full year of €7.5 million to €8 million.

It also announced the purchase of the Tower Hotel in Derry for almost £4.4 million (€5.4 million), a fee that is lower than the replacement cost.

The capital-raising in March seemed a remarkable success at the time for a company that was effectively operating a three-star hotel chain (Maldron) and managing a group of hotels that were either in receivership or some other form of financial difficulty. It highlights the remarkable turnaround in the Irish economy over the past year or so.

Dalata was a construct of the Celtic tiger. Set up in 2007, it was funded by investment from the then public company TVC Holdings and Davy private clients. About 100 investors put money into the company, which used tax breaks to build many of its hotels.

Its chief executive Pat McCann personally invested €1 million in the venture. When I interviewed him for this newspaper in March 2012, he reckoned his investment was worth “probably 30 per cent of that now”.

At the time, €42.3 million was owed by way of loan notes to shareholders, with interest of about €3.5 million a year racking up on this debt. The loan notes didn’t exercise until there was a liquidity event, which McCann predicted at the time wouldn’t be until “at least” 2017.

McCann and Dalata were able to fast forward their plans on the back of Ireland’s successful exit from the IMF-EU bailout programme and the enormous investor appetite that has emerged for Irish hotel assets as our economic recovery continues apace. About €1 billion will be spent this year buying hotels in Ireland, according to Dalata.

Two and a half years on, McCann now presides over a business with a market cap of €378 million. He owns 627,200 shares that are worth just under €2 million at current price levels. In addition, he has been awarded 128,000 shares, at nil cost, under a long-term incentive plan that will vest in March 2017 if certain performance targets are met. On paper, these are worth almost €400,000 to him.

Ballsbridge hotels

There’s another remarkable aspect to the Dalata story that relates to the Clyde Court and Ballsbridge hotels that it currently operates under contract for a group of lenders comprising Ulster Bank,

Rabobank

and private equity group

Blackstone

.

Dalata has agreed a deal with Blackstone to acquire its interest in the two hotels, which are owned by Qulpic (Clyde Court) and Zrko (Ballsbridge). In a nutshell, it has agreed to pay €21.8 million to acquire 25 per cent of the share capital in each of the companies.

McCann said yesterday that Dalata would be interested in acquiring the loans held by Ulster Bank and Rabobank, something that would bring the total transaction cost for Dalata to about €100 million. He expects an answer “within a number of weeks”.

If he pulls off the deal it would be quite a coup. In 2005, Carlow property developer Seán Dunne paid €400 million for the two hotels – €275 million for the Ballsbridge property and €125 million for the Clyde Court. Who brokered the deal? None other than Pat McCann in his capacity as chief executive of the then publicly-quoted Jurys Doyle chain (now the Doyle Collection).

No guarantee

He might now be able to buy them back for one-quarter of that price. It’s not a slam dunk. Ulster (owned by Royal Bank of Scotland) and Rabobank have pre-emption rights on Blackstone’s shares and could choose to exercise them, thereby cutting Dalata out of the picture.

However, both have been actively selling off their toxic Irish assets and, having incurred enormous losses here since 2008, it seems unlikely that they would want to follow their money.

Will they sell their share to Dalata as part of this transaction? That’s not clear. With Irish hotel assets hotter than a hot potato right now, they might be minded to bide their time in the hope of squeezing a bit more juice from the orange.

It sounds daft, given how much the valuations have plummeted, but the hotels are still considered “premium assets” by the banks.

This wouldn’t be a disaster for Dalata. If it acquires the Blackstone interest, it will have first dibs on the Ulster Bank and Rabobank shares whenever they decide to cash in their chips. So McCann and his investors would have a strong hand to play whenever the cards gets dealt.

With the €256 million in IPO cash already in the kitty, and plans to leverage this with a similar figure in debt (ironically, Ulster Bank is one of the lenders it’s negotiating with on this), Dalata should have plenty of firepower in its armoury to transact what could in the long run turn out to be quite a sweet deal.