Six Continents will exile Prosser to keep Osmond out

Telegraph  -  How much should shareholders pay for the financial acumen of whizz-kid entrepreneurs? The answer to that question will probably determine the fate of Six Continents, the hotels and pubs group that faces a hostile bid from Hugh Osmond tomorrow.

Osmond has a pretty impressive record of creating wealth, and vast dollops of it have accrued to himself. But if he and his team succeed in their latest adventure, they could reap between £200m and £300m.

That might be hunky-dory if 6C's shareholders also secure chunky capital gains on their holdings. And I am told, in advance of seeing the fine print, that Osmond would secure that kind of bonanza pay day only if he created around £1bn of additional value out of 6C's assets.

Osmond's approach would be to sell off around £5bn of 6C's properties and bring in an outside hotel group - yet to be chosen - to manage its InterContinental, Holiday Inn and Crowne Plaza chains. Meanwhile, he would manage the licensed premises (where he has a demonstrably impressive track record).

So how would that translate into hard cash for him and 6C's shareholders? The maths works like this.

Osmond is assuming, on the basis of brokers' estimates, that a mainstream break-up bid for cash would value 6C at around 625p to 650p per share, or roughly £7.5bn in debt and equity - and that would be his starting point in any assessment of whether he pushes up the intrinsic worth of the business.

If he cannot improve the value of the business above this level, he makes nothing. But he takes 20 per cent of every pound added to that number.

That's a pretty rich return - though it is the standard turn taken by venture capital firms when they buy companies.

The difference in this case - which should not bother shareholders in theory, but may well do in practice - is that 6C would not be taken off the stock market by Osmond, in the way that a traditional venture capitalist would. Osmond would simply swap shares in his takeover vehicle, Capital Management and Investment, for 6C's paper.

Anyway, if he creates £1bn of extra value, that delivers £200m to him. But - and this is not a trivial point, so it's worth repeating - he earns a big zilch if there is no wealth created above that 625p-to-650p per share level.

As it happens, I think he expects to generate around £1.5bn out of 6C, which would deliver a fabulous £300m to him and his team.

So the task for 6C's incumbent managers is simple. They have to prove that they are capable of delivering the same kind of return as Osmond but at a lower price. In other words, this battle is all about the credibility of the two competing teams.

It is going to be closely fought; 6C's alternative is to break itself up into two quoted companies, a hotels group and a pub company. And the point is that institutional shareholders have been pushing for this demerger for a good year, so are not yet ready to give up on the incumbent management.

But when 6C executives went to see their big shareholders last week, they received one message loud and clear. They want the early retirement of Sir Ian Prosser - which is slightly odd, since he was due to go at the end of the year anyway.

Their wish will be granted, probably as early as this week. Why? Well, bankers and brokers advising 6C have sharp memories of Granada's takeover of Forte six years ago. They believe Forte would have seen off Granada if Sir Rocco Forte had fallen on his sword, and they do not intend to repeat that perceived error.

Will the ritual sacrifice of Prosser appease the blood lust of institutions sufficiently for them to spurn Osmond? Possibly. Should it appease them? Pathetically, I am still reserving judgment

However it occurs to me that if Osmond's financial engineering actually makes sense. then 6C's incumbent management should simply steal the plans and do it for themselves. I think that approach is called learning from best practice.

Osmond:  'We do not pretend to be hotel managers'

Hugh Osmond plans a daring £5.4bn bid for leisure giant Six Continents. In an exclusive interview with Damian Reece, he says he can unlock wealth that the company's existing management cannot find

Hugh Osmond revels in his enfant terrible reputation, acquired three years ago when he humiliated Allied Domecq and Whitbread - the blue chips of the brewing industry - by smashing up their friendly pubs deal with his hostile £2.75bn cash bid.

A couple of grandees, Sir Christopher Hogg and Sir Michael Angus, the respective chairmen of Allied and Whitbread, sloped off with sore heads.

Now the hugely wealthy pubs and pizzas financier has initiated an even bloodier brawl, with a planned £5.4bn bid for Six Continents, which owns the Holiday Inn and Inter-Continental hotel chains and some 2,000 pubs and restaurants.

But this time Osmond's own expertise and skills are on the line, because when the bid comes he will be offering shares in his takeover vehicle, Capital Management & Investment, as well as cash. And that means his own track record will be under intense scrutiny: Six Continents' shareholders will only take his paper if they believe he can deliver the profits he promises.

So we asked him why he can do better than 6C's existing directors. Disarmingly, the former medical student admits to knowing nothing about running hotels.

"We do not pretend to be hotel managers," says Osmond, sitting in the offices of his lawyers Slaughter & May, located opposite Whitbread's historic but defunct Chiswell Street brewery in the City, a reminder of his past victory.

"What we will do is contract out the hotel operations to the best third party operators for each type of hotel chain we own. We will maximise profits and reduce costs. The upside is huge.

"Given that the performance of all the best international hotel operators is three times better than that of the present Six Continents management, that should not be too difficult," he claims - although 6C's legion of advisers is already crunching through pages of numbers to prove him wrong.

He plans to boost shareholder returns further by selling off Six Continents' property portfolio and handing the cash back to investors. More cash will be raised by issuing bonds secured against the cash flow from the company's Holiday Inn franchise in North America and its pub estate in the UK.

So that's the theory. But does his own history suggest he can deliver?

"Look at the Allied Domecq pubs deal," says Osmond. "We paid £2.75bn compared to the £2.4bn which those two FTSE100 companies [Allied and Whitbread] originally said was the best deal around. Show me any fund manager who would not want an extra 14.5 per cent return."

Of the 1,500 Allied Domecq pubs he bought, he actually sold 550 to Six Continents, then called Bass (so he knows quite a lot about his opponent's assets). And he can't resist a dig at the purchaser.

"They [Six Continents] claimed to have bought the pick of the bunch for a very good price. But they have since been shown to be making no worthwhile return on those assets at all [something his target will also dispute in the coming weeks]. If they were the cherries, I would have hated to have picked the lemons," says Osmond.

But we are jumping the gun here. An examination of his skills must start with his early incarnation as the capo di capi of the UK's pizzeria owners.

Osmond and his then business partner, Luke Johnson (a columnist for The Sunday Telegraph), acquired Pizza Express through a quoted shell company called Star Computer at the beginning of 1993. It was funded by issuing about 35m shares in Star, valuing the restaurant chain at between £15m and £20m.

Anyone who subscribed to that share issue did very well. From a chain of 68 restaurants, making £1.5m in operating profits from £16.3m of sales, the business grew to a stock market value at its peak of more than £700m in 1999, equal to 977.5p a share.

It had a chain of more than 300 restaurants. Turnover peaked at £213m and profits at £40m. But the Pizza Express story had a sting in the tail. The shares fell last year from 921p to 247p after profit warnings and poor trading. The company is now the subject of its own takeover tussle, which includes a bid from Johnson (who, by the way, is no longer one of Osmond's buddies).

Osmond was long gone before the profit warnings. He stepped down as an executive director in July 1997 and severed all connection by resigning as a non-executive at the beginning of 2001, taking a £150m personal fortune with him.

However, while building Pizza Express, Osmond and Johnson bought into My Kinda Town, another restaurant chain, for £15.7m. It was floated in 1994. They sold two years later to Capital Radio for £51m. The acquisition turned sour for Capital Radio, which sold the business in 1999 at a £35m loss.

Anyway, by the time Osmond had resigned as an executive director of Pizza Express, he had already started building his tenanted pubs group.

In 1996 he put most of his fortune into the £200m acquisition of the 843-strong Wellington pub company from Nomura. By now parted from Johnson, he had help from Roger Myers, another leisure entrepreneur, and Morgan Stanley.

Soon afterwards, he had his first encounter with Six Continents, buying 1,500 of its tenanted pubs for £563.4m with financing from Bankers Trust. This became Punch Taverns.

Next came Osmond's master stroke. He persuaded Texas Pacific, the private equity firm, to acquire a majority stake in Punch in 1999, valuing the business at more than £800m.

With this new backing and an eye on a stock market flotation, Osmond went on a spending spree, paying £68m for the quoted Inn Business group and £2.75bn for Allied Domecq's pubs.

Osmond completed his exit from Punch, selling his equity to Texas Pacific, in plenty of time before the company's flotation last year. The shares were floated at 240p each. They are now 155p - and Texas Pacific is nursing losses on its 17.46 per cent of the company.

So what's the judgment on his wealth-creating abilities? Well, he has done brilliantly for himself. And he helped create a huge amount of value for the early shareholders in Pizza Express.

The lesson of the other deals is to invest when he invests and sell out when he sells. Anyone who does the opposite - such as the late arriving Pizza Express investors or Capital Radio or Texas Pacific or subscribers to the Punch Taverns float - may find that much of the upside has already been extracted.

So if 6C shareholders accept his shares in the ensuing takeover battle, they know when to bail out.

Osmond stands to make £200m from Six Continents takeover

Telegraph  -  Hugh Osmond will take 20 per cent of any gains he generates from Six Continents' assets if his takeover bid for the hotels and pubs conglomerate is successful.

This could see him and his team earn more than £200m over the coming two years and is bound to be attacked by 6C's management.

Osmond is planning to launch an all-share offer worth £5.4bn for Six Continents when the stock market opens tomorrow. He has also raised credit of between £1.2bn and £1.4bn so that Six Continents' shareholders can elect to take cash instead of paper for about a quarter of their shares.

It is understood that HBOS will provide much of the loan, with further support coming from CSFB and Lehman Brothers.

Meanwhile, Six Continents is expected to shore up its bid defences by succumbing to shareholder pressure for the early retirement of Sir Ian Prosser, its longstanding chairman. His departure may be announced this week.

"When we met with shareholders last week, they made it clear they wanted Ian to go," said a banker. "I have no doubt that he will stand down if he sees it is in the interests of the company."

Prosser's departure would mark the end of an era for 6C, since he more or less created the group after becoming chief executive in 1987 (when it was called Bass) and then executive chairman in 2000.

For most of his tenure, he was regarded as one of the most successful heads in the leisure industry. However, over the past two years, a caucus of large investors - led by Hermes, which manages BT's pension fund - has mounted an effective campaign, alleging that 6C's recent deals have been bad for shareholders.

Although 6C has consistently rejected that analysis, last year it finally agreed to break its business into two separately quoted companies, a hotels group and a pub company, to be called Mitchells & Butlers. It is now struggling to push through this demerger, in the face of a hostile bid from Osmond.

Six Continents has taken the unusual step of hiring a telephone marketing firm, Salisbury, to lobby its small shareholders to vote on the demerger proposals at the extraordinary meeting on March 12, in order to thwart Osmond.

"I was called at 10.50 yesterday morning by a chap with a Spanish accent asking me if I was aware of the Six Continents' demerger," said Guy Adams, an investor with the gargantuan stake of 433 shares, equal to 0.0000005 per cent of the company's issued share capital.

Adams was then asked which way he intended to vote. "I told him my instinct was to back what the board told me to. He then said: 'Well done, that's very good of you'."

Rebellion over share options at Six Continents

The Independent  -  Britain's largest shareholder group is urging members to reject Six Continents' executive share option schemes, potentially threatening the company's plans to demerge its hotels and pubs business.

The National Association of Pension Funds (NAPF) believes the schemes' performance targets are too low, payouts too high and that they lack transparency.

The NAPF is urging members to take action at Six Continents' extraordinary general meeting on 12 March, called to approve the demerger and return £700m to shareholders.

But this could play into the hands of Hugh Osmond, the pubs entrepreneur stalking Six Continents, which owns the Holiday Inn and All Bar One chains. Mr Osmond is expected to table a formal offer early this week. Mainly in shares, the bid will be made through his company, Capital Management & Investment, and will value Six Continents at around £5.7bn.

The offer and the "no" vote from the NAPF will put pressure on Six Continents' chairman, Sir Ian Prosser, to adjourn the EGM and buy more time to see off Mr Osmond.

Six Continents' executives plan a new round of shareholder meetings once Mr Osmond has made his bid. If three-quarters of them express an interest in Mr Osmond's offer, then Sir Ian will almost certainly cancel the EGM.

A spokesman for Six Continents refused to comment on a possible offer. On the share option schemes, he said: "We believe they are fair and contain sufficient performance criteria to stretch and incentivise employees to grow the business."

International Occupancy and Rate Report
December 2002 Summary Report

Year-end 2002 results from the Asia Pacific edition of the HotelBenchmark Survey by Deloitte & Touche revealed that of the 22 cities tracked, just over half reported positive growth in revPAR for 2002.

Star performers for the year included Auckland, Jakarta, Ho Chi Minh City and Shanghai - all reporting double-digit revPAR growth. Conversely Bali and Osaka did not fair so well - reporting revPAR declines of 12.5 percent and 13.7 percent respectively. In both cases this was predominantly influenced by declines of occupancy of around 10 percent in each.

Preliminary tourism figures for 2002 from the World Tourism Organisation (WTO) showed Asia and the Pacific stealing the number two spot from the Americas in terms of international tourist arrivals. After the Middle East, the region saw the largest increase in international visitor numbers of 7.9 percent of the five regions tracked by the WTO. China - currently the world's fifth top tourism destination, but tipped to become the number one by 2020, saw visitor numbers increase in 2002 by 11 percent compared to the prior year. Clearly China's accession to the World Trade Organisation at the end of 2001 has had a role to play here.

Not surprisingly particularly given the events of October 12, overall tourist arrivals to Indonesia declined by 2.2 percent in 2002 from the previous year (to 5.03 million). Despite tough trading conditions at present for Bali hoteliers it is hoped that the tragedy will not have a long-term impact on the island. Events such as the 52nd PATA Annual conference in April and The Council of Australian Tour Operators conference in June as well as the launch of the islands first international airline, Air Paradise in February are all anticipated to help boost visitor numbers in 2003.

Looking to the new year, preliminary January 2003 figures indicate that hotel performance is moving in the same direction - with Auckland, Ho Chi Minh City and Shanghai all reporting strong revPAR growth compared to the same period in 2002. Bali however continues to suffer, reporting double-digit revPAR declines.

Note - all analysis is in US dollars.

The HotelBenchmark Survey contains the largest independent source of hotel performance data outside of North America and tracks the performance of over 6,000 hotels. The Asia Pacific edition collects occupancy and average room rate data from over 1,100 hotels representing just over 330,000 rooms every month. For further information or details on how to join the survey please visit  < www.HotelBenchmark.com > or contact Pooja Madhok on +44 20 7304 095.

December performance

Rolling 12 months to end of December 2002