Nomadic Great Southern may find its home

It should be a relief to Great Southern Hotels, the nomad of the semi-states, that it will be sold. Up to now it has been shoved, as the unwanted, from one semi-state group to another. It could be given the opportunity to flex its own independent muscles - but will it?

Dating back to 1845, it had its origins as the old railway hotels in Killarney and Galway. The enlarged group became part of CIE in 1961, then in the 1980s CIE off-loaded it to CERT, the tourism training body, and nine years ago, it was subsumed into Aer Rianta.

No State-sponsored body wanted Great Southern. E will have bitter memories: it had difficulty consolidating its group accounts in 1984 because its hotels subsidiary was technically insolvent. Is it any wonder CIE sold the subsidiary to CERT for a nominal £1? Now as part of the privatisation of Aer Rianta, it will be disposed off to yet another group. If that provides it with permanency, it will at last have found its niche.

Considering the seasonality of most of the hotels, however, it could be dismembered and sold off in two parts: the Dublin airport hotel and planned Cork hotel, as one package, and seven hotels (the Great Southern and Torc in Killarney, Parknasilla, Shannon, Rosslare, Corrib and Eyre Square in Galway), in a separate package.

That would be the easiest way out financially but would place the seasonal side in a more vulnerable position. There are alternatives, and these should be explored. It could, for example be floated off as a subsidiary of the privatised Aer Rianta, or floated off as a separate entity, or sold to an MBO team. But is it equipped to go down any of these routes? Importantly, does it have the skills, and potential, to compete successfully with groups which are kept on their toes by being answerable to demanding shareholders?

Its last annual report complained about increased capacity which resulted in "reduced occupancy rates, unprecedented price competition and a shortage of skilled staff for our industry". Up to a couple of years ago it appeared content to sit on its laurels; it was not expanding by buying hotels such as Ryan Hotels and Jurys.

Perhaps its short disastrous excursion into Belfast dampened its ardour. That timidity, however, appears to have changed. Last year it opened the new Great Southern Hotel at Dublin Airport and business has exceeded expectations.

New conference rooms were added this year and a further major expansion, including additional bedrooms, is planned for 2000. And the planned 85-bedroom Great Southern Hotel at Cork Airport is about to go out for tender and should be open in March 2001. All these are being funded from its internal resources.

Also the group has been trying to cope with the problems of seasonality. In 1998, the Great Southern in Killarney remained open. The beautifully situated Parknasilla will open for all of 1999 for the first time in its 104-year history. "The development of off-season business for resort locations remains one of the key targets of the marketing plan," Great Southern's annual report said. But how does it shape up financially? Its full accounts, supplied by Private Research, show a rise in turnover to £26.7 million in 1998 from £21.9 million in 1997.

Pre-tax profit increased from £2.88 million to £3.37 million. Pre-tax margins fell from 13.4 per cent to 12.6 per cent. These are well below Ryan's 19.7 per cent and Jurys Doyle's 27.7 per cent. Also it gets much lower return from its bedrooms. Its 1,013 bedrooms generate only an average pre-tax profit of £3,326 compared with the £5,454 Ryan Hotels generates from its 1,430 bedrooms. Jurys Doyle does much better; on the basis of projected profits of £45 million, it will generate an average of £8,220 from its 5,450 bedrooms. While these figures reflect the seasonality of Great Southern's business, it also indicates the potential the group has, particularly if it continues to expand into non-seasonal areas, such as another Dublin hotel. And with gearing of only 12 per cent, it has scope to expand further from internal sources. So what sort of a price tag can be placed on Great Southern Hotels? The sale is not scheduled until 2002 and by that time the group should be generating more than £4 million (€5.1 million) pre-tax profit, provided it can continue to address the seasonality problems. Most of the tax credits have been used up but it could generate a net profit of some £3.7 million.

Assuming a prospective p/e of about 10, the group could have a value of £37 million, similar to 1998's net asset. But the book value of the net assets should be more than £40 million by 2002. Also, these must be considerably undervalued, as they were last valued in 1994. A revaluation should bring this to well over £50 million.

To justify that price, potential buyers, or a would-be MBO, would need a plan to squeeze much more out of the assets than currently. But the ugly duckling of the semi-states now has a real value. And Aer Rianta, which took it under its wing for £14 million (£10 million for the company and it injected £4 million as a subordinated loan), will show a handsome profit.