Reborn Stakis flexes its muscles

WHILE sales of luxury hotels like the Savoy and, last week, Cliveden have captured the headlines, the real star of the booming UK industry this year has been Stakis, the Scottish-based group which has come back from the brink of collapse since the beginning of the decade.

The company's shares have soared 21 per cent in just three months since the hotel operator announced a link-up in March with US Strategic Hotel Capital. This has convinced investors that Stakis now has the financial clout to expand more aggressively in its home market.

Stakis, which began as a single restaurant in 1942, built an empire of hotels, nursing homes, and even a stock brokerage, in an over-ambitious expansion drive that, by the early 1990s, had landed the company in financial trouble. When chief executive David Michels came aboard in 1991, he shed the company's nursing homes division, and set a 15 per cent target for annual earnings per share growth.

Last year he exceeded this goal comfortably, notching up a 21 per cent earnings gain. This rounded off a remarkable two years when Stakis acquired eight hotels and opened three others, boosting its room numbers by more than half. Lower-grade properties have been discarded.

"Michels has focused it down to casinos, hotels and leisure centres," said Thorold Mackie, an analyst at Sutherlands in Edinburgh. "He's a very strong operating hands-on man and the benefits have come through."

Stakis was founded by Sir Reo Stakis, 85, a Greek Cypriot who started his career at 15 peddling handsewn lace made by his mother. He took the firm public in 1972 with a capitalisation of pounds 7.2m. It is now worth pounds 1.05bn and owns 54 hotels, 22 casinos and 61 LivingWell health clubs.

Stakis's expansion comes at a time of rapid growth and consolidation in the hotel industry. Just last week, Destination Europe USA, a consortium including Microsoft Chairman Bill Gates, paid pounds 42.8m for Cliveden, the former home of the Astor family. In April the US Blackstone Group bought the Savoy, the owner of four luxury hotels, for pounds 520m and Patriot American Hospitality, another US company, spent pounds 92m on Arcadian, the owner of Malmaison hotels.

Stakis's last big purchase was the pounds 327m acquisition of five Metropole hotels from Lonrho in October 1996. This was funded through a pounds 222m rights issue and increased its room count by some 50 per cent. Now Stakis is considering a bid for Thistle Hotels, the UK's third biggest chain, with a market capitalization of pounds 1.4bn. This news followed speculation that Stakis had considered, then abandoned, plans to bid for the smaller Vaux Group. Stakis would not comment on specific acquisitions.

The Thistle chain, with its 91 hotels, is half as large again as Stakis. Analysts said a property investor like Strategic Hotel Capital would give Stakis the financial muscle to make such a large purchase.

Stakis already manages a London hotel for Strategic Hotel Capital, a contract which it secured in March when it agreed to sell the leasehold to them. At the time, the two parties said they wanted to forge similar management pacts elsewhere in the UK. The move "proved that Stakis has the credibility to manage a hotel on behalf of investors," said Fraser Ramzan, an analyst at Lehman Brothers.

The company itself has limited its room for manoeuvre. It has pledged to hold its gearing, currently 39 per cent, to below 50 per cent. "If they are going to do anything, they'll do it with a financial backer," said William Barney, a director in KPMG's consultancy division. "I don't think they'll overreach themselves under the present management."

Stakis's reported interest in Thistle, the owner of London's Tower and Mount Royal properties, comes after it abandoned plans to buy Swallow Hotels - owner Vaux. Thistle's portfolio is more upscale than Sunderland- based Vaux's, with more than half its 12,993 rooms in the lucrative London market.

An acquisition of Thistle could tax Stakis's management resources, though Lehman Brothers' Mr Ramzan said the company is "very good at assimilating properties quickly". The first task Stakis would face would be weeding out poor-performing hotels - Thistle has said it wants to shed 30 hotels outside London, or a third of its portfolio.

One question mark is the outlook for the hotel industry. Though analysts expect room rates to rise for the next two years as companies get smarter at selling at higher prices to business customers, occupancy rates probably will not.

Some observers also fear the impact of Asia's economic slowdown, which is already slowing the flow of tourists and business travellers.

Copyright: IOS & Bloomberg