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TSOGO SUN FORMALISES HOSPITALITY SHARE DEAL

HOTEL and gaming group Tsogo Sun has formalised an agreement to take control of Hospitality Property Fund, creating a real estate investment trust (Reit) with assets worth about R6.8bn.

Hospitality will acquire 10 hotel properties, valued at almost R1.8bn, from Southern Sun Hotels, a wholly owned subsidiary of Tsogo.

The purchase consideration will be settled through the issue of 145-million Hospitality shares. On completion of the transaction, Tsogo will hold more than 50% of Hospitality’s ordinary shares.

Hospitality, the only hotel-specialised Reit in SA, has struggled after the 2010 Soccer World Cup construction boom. New CEO Vincent Joyner said Tsogo’s investment would help the fund to expand more quickly.

“The transaction will see Hospitality forming the platform for Tsogo’s strategy of growing a hospitality-focused Reit. It therefore provides us with exciting future growth prospects and an attractive pipeline of acquisitions in the medium term. Tsogo has a large portfolio of hotels which can be injected into the fund in the future,” said Mr Joyner.

As a result of the transaction, Hospitality’s gearing ratio will drop from 36.2% to 26.9%, which, together with the company’s greater scale and inclusion as part of Tsogo, is expected to reduce the pricing of Hospitality’s future borrowings.

The transaction is conditional on the restructure of Hospitality’s dual-class capital structure into a single share capital structure by way of a swap ratio of 3.5 B ordinary shares for every 1 A ordinary share.

The contentious A and B unit structure is to be collapsed. Only B shares will remain. The structure was developed to offer different risks and rewards for shareholders. Those who own the less-risky A units are paid distributions first, which are capped at consumer price index or 5%, whichever is lower. B shareholders receive the balance, with the potential to reap higher rewards, but also suffer higher losses. Hospitality has performed so poorly that the B shareholders have received relatively little income over the years. This, together with the costs of managing two listings that share assets led to the decision to discard the dual structure.

Some A shareholders have said they do not feel the share swap ratio takes into account that they are making sacrifices through the share structure collapse.

Source: BDLive – Alistair Anderson