Jurys to take momentous decision

A lethal cocktail or a lingering stimulus? The ingredients look innocuous enough. Start with eight hotels and nine inns. Gently add 11 hotels. Shake well. Shareholders at today's extraordinary general meeting of Jurys Hotel Group will be asked to approve that brew laid out in the offer document in what will be their most momentous decision to date. Up to now, Jurys has plotted a careful strategy; having representation in selected areas and avoiding over-exposure in any particular area.

Now, in just one swoop, with the acquisition of the Doyle Hotel group, it will boost the number of hotels located in Dublin from two (Towers and Jurys) - plus two inns - to nine, with a market share of more than 20 per cent. It will also be gaining entry to the US market with three hotels in Washington.

With the heavy influx of new hotels in Dublin, that market is becoming increasingly competitive. The five-star Four Seasons will be coming on stream with 250 bedrooms at the end of the year. That together with Bewleys' 100 bedrooms will compete directly with Jurys' hotel in Ballsbridge, and with Doyle's Westbury and Berkeley Court.

If buoyancy holds up that should not be problematic, but any downturn would leave the enlarged group over-exposed. There could be some 13,000 bedrooms in Dublin by the end of 2000. That compares favourably with other European capitals, particularly as the Irish market continues to be very strong.

Jurys is effectively paying £119,000 per bedroom. The valuations in the offer document of the Irish hotels vary enormously. The Westbury, for example, has a value of £197,000 per bedroom, while the Doyle Tara, in Merrion Road, Dublin, has a value of only £37,600. Jurys has said it does not intend to sell any of the Doyle hotels, but it could at some future stage sell those with a lower valuation.

The deal which will be considered today is in some ways reminiscent of that organised by Mr Hugh Tunney when he sold the Gresham Hotel. As part of that deal, he retained the largest penthouse suite with 2,400 sq ft, which he will hold until he dies; then it reverts to Ryan Hotels.

Some 8 per cent of Doyle's operating profit came from investment properties in 1997/8 but this will now disappear following the purchase of a whole host of properties from the Doyle group, by some of the Doyle family, just before the deal was struck. They were not available for consideration by Jurys. These include:

A house and premises at 44/C de la Calle Corte Fuego no. 4 Los Monteros, Marbella, Spain, for 38.55 million pesetas (€0.23 million).

30 shares in Extern Travel for £990,000.

120 to 127 St Stephen's Green, Dublin, £8 million.

Cranford House, £810,000.

Apartments 7 & 8 Cranford Hall Stillorgan, Road, Dublin, £290,000.

10a/11 Homefarm Park, Drumcondra, Dublin, £120,000.

99, 100, 101 and 102 Upper Leeson Street, Dublin, £2 million.

Oak Lodge, Bellevue Avenue, Booterstown, £120,000.

31a Upper Drumcondra, Dublin, £225,000.

Mews apartment at Rosses Court, Dun Laoghaire, £130,000.

Judging Doyle's financial records is not straightforward and they are pretty dated. The last results, for example, are for the six months to July 31st, 1998, or almost a year ago. The full year results - to January 31st, 1998 - produced in the offer document indicate a more than trebling of the pre-tax profit from an effective £4.6 million to £15.6 million in a two-year period. This, however, was mainly due to a substantial drop in the remuneration going to the directors.

A more useful indication of the core trend is the effective 32 per cent gain in the gross profit over a two-year period. And sales over the same period rose by a more pedestrian 19 per cent. Based on these figures, the owners of the Doyle Hotel Group probably made the right decision not to float separately and instead to accept the Jurys' offer. However, the owners drove a hard enough bargain. While the €314 million consideration representing 15 times earnings before interest and tax has been favourably compared to the 22 paid by Ladbrooke for Stakis, that latter multiple was very high.

On paper there appears to be scope to squeeze more out of the enlarged group. Doyle's occupancy rate, for example, could be brought up from some 75 per cent to Jurys' level of some 80 per cent. The larger scale should reduce costs and there should be booking and marketing benefits. And the group has said the deal will be "mildly" earnings enhancing in 1999/2000 prior to goodwill write offs, and "mildly dilutive" after goodwill.

While Jurys is assuming €76 million of Doyle debt, its gearing should not be more than 60 per cent. That, and the prospective interest cover of around 5, should still allow it some financial flexibility.

It is a courageous deal for Jurys, which will be faced with integration and upgrading costs. While the Jurys' executive directors are firmly in the saddle, Doyle's will have three non-executive directors - Ms Bernadette Gallagher, Mr Tom Roche and Ms Eileen Monahan - who will own the largest block of shares with a 25 per cent stake. Shareholders will be hoping that the mix of the two different cultures fuses into a palatable cocktail.