Business

Paddy McKillen’s billion pound battle for prestigious Claridge’s of London

A fiery dispute has erupted between the hotel’s Qatari owners and former developer Paddy McKillen

Irish property developer Paddy McKillen. Photograph: Yui Mok/PA Wire

Daniel Thomas
Alice Hancock
Fri Jun 10 2022 - 08:58

Claridge’s hotel is busy preparing for trade to roar back from the pandemic. Its penthouse suite is due to reopen this year after extensive redevelopment, with a bespoke Steinway piano and a price tag that could stretch to £100,000 (€117,000) a night.

Beneath the art deco lobby a team of Irish builders has been working on an ambitious five-storey excavation that will house a luxury members’ club and spa — often digging by hand to avoid disturbing the high-paying guests 10 metres up.

Sir Jony Ive, the former head of design at Apple who has stayed at Claridge’s “four or five times a year” for the past 15 years, told the Financial Times the structural renovation was “unlike anything I have ever seen before”.

But behind the scenes in Mayfair a dispute has erupted that could prove to be the most costly in the storied history of the 220-year-old grande dame of the global hotel industry.

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Billions of pounds could be at stake in a fight between Paddy McKillen, the Irish property developer who owned about a third of a hotel group that also includes the Berkeley and Connaught between 2004 and 2015, and a group of Qatari investors that acquired the properties in 2015 following a bitter ownership dispute.

The battle centres on how much luxury hotels are worth in a post-Covid world where well appointed rooms are once again filling up with guests willing to pay thousands of pounds a night.

McKillen claims he is owed billions of pounds under an agreement to share future profits struck with the Qataris at the time of the 2015 sale, which valued Claridge’s, the Connaught and the Berkeley at £1.3 billion.

The terms of the contract appear clear: McKillen is in line for 36 per cent of the upside valuation of the hotels minus capital expenditure. That payout could be significant, given the work his management company has carried out to add space and improve facilities, people close to McKillen claim.

Some estimates have put a current value of more than £5 billion on the hotels, although Tim Stoyle at Savills warned that luxury hotels trade so rarely “it is very hard to draw definitive trends”.

Maybourne, the hotel operator ultimately owned by Qatar’s former prime minister, Sheikh Hamad bin Jassim bin Jaber al-Thani, and its former emir, Sheikh Hamad bin Khalifa al-Thani, accepts McKillen is owed something — but disagrees on how much.

The two parties cannot even agree which hotels are included in the deal, with the contract definitely covering Claridge’s, the Berkeley and Connaught but, Maybourne argues, not newer luxury hotels in the US and France.

Claridge’s has long been one of Britain’s most prestigious residences and is the flagship London hotel of the Maybourne group. Winston Churchill decamped there in 1945 after the second World War, when it had offered a refined sanctuary to the kings and queens of Norway, Holland and Greece. Britain’s current Queen has eaten so often at the hotel that it has become known as the “annexe” to Buckingham Palace.

Other guests have ranged from Diana, Princess of Wales, to Elizabeth Taylor and Audrey Hepburn to Lady Gaga.

McKillen, a Belfast Catholic and friend of prominent Irish figures such as Bono of U2, became involved with the London hotels in 2004, when he acquired a stake of just over a third in a consortium led by Irish investor Derek Quinlan.

He had built up his fortune in real estate but this was his most high-profile deal yet. The years that followed were successful for Claridge’s but punctuated by tensions over ownership.

The financial crash came quickly after the deal was struck, leaving Quinlan with unsustainable debts that were at risk of being seized by Nama, the Irish state agency set up to deal with bad loans. Quinlan sought help from Sir David and Sir Frederick Barclay, leaving McKillen angry and blindsided.

McKillen battled through a £50 million legal fight with the Barclays to try to regain control of the hotels in one of the most costly legal battles in British court history. He turned to Qatar as the “white knight” to resolve the ownership impasse.

Qatar wanted to own 100 per cent of the hotels, so struck an unusual deal that is only now being tested. McKillen emerged debt free but with a lucrative seven-year management agreement, due to end this December.

That was cut short in April this year, when McKillen awoke to an email sent to staff Marc Socker and Gianluca Muzzi, Maybourne’s new chief executives, saying he would no longer be involved in the management or project management of the hotels with immediate effect.

Hume Street Management Consultants, McKillen’s company, was told it was not required for further work and should not seek access to the hotels’ offices or staff.

Ive, a long-time associate of McKillen, said he was “shocked” by the move. But no one was more shocked than McKillen himself, who colleagues said had expected a “dignified” jog towards retirement at the end of the year rather than a terse letter of dismissal.

McKillen had already stepped back from running two Maybourne hotels in Los Angeles and the French Riviera in January. But when the letter arrived, McKillen and his team were busy working on Claridge’s new penthouse and members’ club.

The McKillen team, which has also developed houses for Calvin Klein and Beyoncé, was hopeful of opening these before the summer. Maybourne told the Financial Times there was still “a very significant amount of work” needed to complete the Claridge’s project.

When the FT visited the development works under the hotel in April, the wood-lined spa areas were finished although the swimming pool was a shell and some levels were still walled in concrete. The rest of the work will now be carried out by other developers.

Maybourne said it had “not renewed our contract with HSMC, the company Paddy controls, after appointing new co-chief executives to reflect the changed direction of Maybourne from the management of individual assets to the creation of a global, ultra-luxury brand”.

“As is standard practice, this means HSMC staff no longer have access rights to Maybourne offices,” it added. Companies House records show that McKillen and his business partner Liam Cunningham left the board on April 1.

The Qataris are in part represented on the Maybourne board by Michele Faissola, a former Deutsche bank executive who was last month acquitted by a Milan appeals court over alleged market manipulation and false accounting linked to his role in the Monte dei Paschi banking scandal.

The Italian motor racing enthusiast has run Dilmon, the al-Thani family office since 2018, according to his LinkedIn profile.

Requests for interviews with Claridge’s management and Maybourne were declined by Maybourne.

The difficulty now for the teams of advisers being assembled is to agree on a value of the hotels — and so of McKillen’s contract.

A London-based real estate consultant said that given the Ritz sold for £800 million, or £5 million per room, in 2020, the renovated 190-room Claridge’s alone would be worth “substantially in excess” of what the Qataris paid in 2015 for the group of three London hotels.

Hume Street also argues that all of the Maybourne hotels and subsidiaries, which would include the French and US sites, are part of the deal.

Maybourne said it covers only Claridge’s, the Connaught and Berkeley hotels, and the others were brought in after McKillen’s time as a part-owner of the group.

Both sides insist the contract is clearly supportive of their view, which means the warring sides may yet head to the courts for a decision in multiple jurisdictions.

A spokesperson for McKillen said: “Any owner of the Maybourne hotels must recognise that they are custodians of unique assets that are a vital part of London’s cultural life. The Qataris have indicated that they value the hotels at a substantial discount to their acquisition cost.”

People familiar with the management’s position said an independent valuation had been made that was substantially above the acquisition price but that the large costs for works specified in the agreed contract have brought McKillen’s payment lower than he might like.

Guests who use the hotels simply hope service will run to the usual levels expected.

Samuel Johar, a headhunter who eats in Claridge’s three to four times a week, said McKillen had made the hotel “a joyous place to go to”.

“Let’s hope these two [new] guys ... don’t screw it up.” — Copyright The Financial Times Limited 2022