The proposed deal between Brookfield Asset Management and debt-laden Leelaventure would pave the way for more consolidation through mergers and acquisitions in India's hospitality sector, say analysts.
Brookfield's proposed entry into the hospitality sector would open up the sector for similar investments into other assets by Canada-based firms and also evince interest from other private equity funds.
"If you have a new buyer in town, it will buy more assets and not pause with just one asset. Just like a Blackstone opened up the market for office space, a Brookfield may open up the market for hospitality," said Shobhit Agarwal, MD & CEO of Anarock Capital, a consulting firm.
"There is no dearth of individual-owned hotels in India in dire need of investments," said Agarwal. In a bid to trim debt and fund growth, most of the big hotel chains are increasingly adopting an asset-light model.
"If you remove all the balance sheet issues, Leela properties have a very good occupancy and ARR (average room rate). If the debt is taken care of, they will be able to sharpen the focus on operations," said an analyst. According to him, the deal with Brookfield would pave way for consolidation in an industry that has just started seeing a resurgence on back of better occupancy.
At the end of March 2018, Leela's consolidated debt was Rs 36.62 billion. If the deal with Brookfield goes through, it would be a big relief for the cash-strapped firm as it would help in paring its debts. According to unconfirmed reports, Brookfield will buy four out of five Leela properties for Rs 45 billion.
"The company and the lenders continue to evaluate various offers, in order to achieve maximisation of value for all the stakeholders and there is no binding contract with any investor as of date", said a spokesperson for Hotel Leelaventure.
Branded hotels in India reported a nationwide occupancy of 66.6 per cent in 2017-18, the highest in a decade, according to a report on trends and opportunities in the Indian Hospitality sector by Hotelivate, a consulting firm. At Rs 3,837, the year was also the best in terms of revenue per available room (RevPAR) since 2010-11.
A person aware of the Brookfield deal said, "There is a non-binding offer on the table. But, it will take a while before the deal is sealed. The banks are evaluating all options. If the deal does go through, it will be one of the largest one in India's hospitality sector in the recent past."
JM Financial Asset Reconstruction Company (JMFARC), which owns 75.2 per cent stake in Leela, has been weighing investor proposals for some time now. Brookfield is reported to have been in talks with the promoters since August.
Leela had restructured its loans under the earlier Corporate Debt Restructuring (CDR) mechanism, with January 1, 2012 as the cut-off date. One of the conditions of that package was debt would be brought down by Rs 20.3 billion by selling the Delhi hotel by 2014 March end. The company said a continuing recession in the segment had prevented this.
As a result, on 28 June 2014, lenders declared the CDR mechanism had failed. Following which, 14 lenders with a combined exposure of 95.6 per cent of the CDR debt had assigned their dues to JMFARC.