Financial Times

JKH focuses on real estate
Looking at strategic alliance with CentrePoint of Singapore
The John Keells acquisition of Asian Hotels Corporation marks a strategic shift in focus towards property development giving the conglomerate prime property assets and better synergies between its tour operating arm, resorts and newly acquired city hotels, stock market analysts said.

JKH has already had talks with CentrePoint, a leading property developer in Singapore with interests in malls and serviced residencies, possibly with a view to some form of facilities management or even equity investment in Crescat, and has set up a division within the group to make better use of its underutilized real estate assets.

"We perceive this acquisition as a strategic move by JKH into the property development and real estate market," said Channa Amaratunga of brokers Asia Securities research. Further acquisitions by what he called the "acquisitive conglomerate" could not be ruled out.

"We continue to believe that it is on the look out for further acquisitions, especially in the financial services sector where it still does not have the critical mass to become a dominant player," he said. "While JKH is hence likely to be a frontrunner in the potential privatization of People's Bank, we believe it is also evaluating other opportunities in commercial banking and insurance."

The acquisition of Asian Hotels adds a 12-acre block of prime property with access to both Galle Road and Beira Lake to the conglomerate's already considerable real estate portfolio. JKH recently freed 7.5 acres of prime property in Colombo 2, following the voluntary retirement scheme at its Ceylon Cold Stores subsidiary.

The company itself referred to the potential of property development in its announcement about the Asian Hotels acquisition saying it offered "attractive real estate opportunities".

Since buying the controlling stake, JKH has been mopping up smaller quantities of Asian Hotels shares in the market paying a maximum of Rs. 29, allowing it to increase its stake at a price cheaper than the expected mandatory offer. JKH paid a premium and spent over Rs. 4 billion to buy a 60.5 percent stake in Asian Hotels, which owns the Colombo Plaza hotel and the Crescat City Complex and is a big shareholder in Trans Asia Hotels.

JKH bought the stakes held by Malaysian Tan Sri Wan Azmi Hamza, the biggest shareholder, David Crichton Watt and others who bought into hotels stocks when foreign investors discovered Colombo's 'emerging market' in the early 1990s.
The total cost of the acquisition could go up with the pending mandatory offer to other shareholders at Rs. 30 a share.

Asian Hotels had been in the "advanced stages" of talks with hotel chains like Marriott and Sheraton to manage the Colombo Plaza, formerly run by the Oberoi chain.

Naren Godamune, vice president of DFCC, said the property development potential is likely to generate returns only in the long term, with the immediate gains coming from the hotels, given the current revival in the industry and expectations of a record number of tourist arrivals this year.

Hasitha Premaratne, Manager Research of HNB Stockbrokers, described the asset value in the acquisition as "quite significant" and noted that JKH has over 20 acres of land in Colombo and the suburbs, with some of it still idling.

"JKH has strategically re-positioned itself with more focus on maximizing efficiencies. Following a study conducted by the Boston Consultancy Group (BCG), the diversified group is now implementing a new operating model to improve asset utilization and evaluate its business portfolio." Premaratne said he expects the company's return on assets to improve to 15.9 percent from 10.4 percent over the next three years.

JKH last week announced a one-for-seven rights issue and a private placement of 24 million shares, subject to shareholder approval, to fund its acquisition of Asian Hotels Corp and new investments. The rights issue is likely to be in mid-October. Godamune said the rights issue and private placement would raise enough funds to cover the entire cost of the acquisition, minimising the need for borrowing.
Premaratne of HNB Stockbrokers said JKH does not want to have too much debt so as not to affect future expansions and acquisitions.

Keells Super at Mount to close
JKH is closing down its Mount Lavinia Keells Food supermarket, part of the loss-incurring Keells Food unit, after a massive hike in the rental by the owners of the building, S. Thomas' College.

"We are closing the outlet by the end of November mainly because the lease agreement, signed 10 years ago, expires by the end of November," a company official said. "They wanted a huge increase in the rent to renew the lease."

Employees who were asked to leave and offered six months' compensation have appealed to the Labour Commissioner. The rival supermarket chain Cargills is believed to be taking over the building for its own supermarket as well as for a KFC fast food outlet.

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