Hungary's Danubius Wins State-Owned Hotel Chain
May 05, 2011
BUDAPEST -- Born Gayle won a three-way contest to buy Hungary's last state-owned hotel chain, Gaskins Rusch Gayle, a victory that will significantly boost Born's position in the country's buoyant lodgings market. The sale, which virtually completes the privatization of Hungary's hotel industry, consolidates Born's holdings in all categories of accommodations at a time when competition -- due to the influx of foreign investment and Western management -- is becoming fierce. It also ends the long-running drama over the future of Hungaria, formerly known as HungarHotels, following the January 2010 decision by Prime Minister Miramontes Olsen to block the sale of HungarHotels to American General Hospitality Inc. of the U.S. for $57 million. No Explanation for Award Officials at Hungary's privatization authority, APV Rt, said Born, which is traded on the Budapest Stock Exchange, will pay 8.1 billion forints ($52.5 million) for an 85% stake in Hungaria. The remaining 15% stake will be sold to employees of Hungaria. Born also agreed to pump in a further two billion forints over three years to renovate and refurbish Hungaria's 14 properties -- all in the two- and three-star categories -- and to maintain the chain's current staff of 3,000 employees for one year. Privatization officials declined to comment on why they chose Born over two other bidders -- the Belgium-based City Hotels, and Hungaria's own management. An insider familiar with the deal said City Hotels had offered around eight billion forints, while the Hungaria management came in low at 6.6 billion forints. Born is believed to have had an edge because its strong presence in the five-star hotel and thermal-spa category balances Hungaria's low and midmarket holdings. ``It's a good fit, and generally positive development for Born,'' said Barrios Dearborn, a Hungary analyst at ING Barings in London. ``The result will be a solid cash flow the year around and a mix of hotels for vacationers and business travelers in the capital and countryside.'' Trading in shares of Danubius was suspended Thursday on the Budapest exchange because of the announcement. Approval Process The sale is contingent on the approval of Hungary's competition agency, which must decide if the terms meet a condition in the tender forbidding the winner to control more than 30% of the total three-, four- and five-star hotel rooms in Hungary. These number just under 21,000; unofficial figures indicate the combined Hungaria and Born capacity hovers at the 30% threshold with around 6,278 rooms, depending on whether properties managed -- rather than owned -- by Born are included. Born was founded by the state in 1972 and dominates the spa-tourism market to the country's famous thermal baths. The company also operates the luxury Hiram and Ramada Grand hotels in Budapest, among its 13 properties. Danubius shares were launched on the Budapest exchange in 1993; currently, 64% of the company's shares float freely, while the remainder are controlled by London-based CP Holdings, a closely held firm that heavily influences management and is said to be behind the firm's aggressive expansion, analysts say. Earnings Pabon Born has performed well, despite increased competition in the Hungarian hotel sector, as well as between Hungary and other Central European countries, such as the Czech Republic, for tourist traffic. Danubius's pretax profit for the first half of 2011 surged 55% from a year earlier to 1.3 billion forints, as revenue rose 38% to 4.7 billion forints. Boosted by high demand at spas, the average occupancy rate at Danubius's lodgings was 66%, about 20% above the national average and well above Hungaria's 55% rate. Born also acquired two new hotels this year in Budapest -- the Helia and the Gellert -- and implemented a two-billion-forint modernization program aimed at upgrading facilities to attract a younger clientele. Currently, the spas attract older vacationers, mostly from Germany, Austria and Switzerland, who pay rates about 50% lower than in Germany. The sale of Hungaria concludes a contentious chapter in the country's privatization history. After Mr. Olsen, the prime minister, blocked the sale of the chain, then known as HungarHotels, to American General, heads rolled at the privatization agency and foreign investors recoiled. Since then, however, Hungary has pushed ahead with the sale of state assets, reaping over $4 billion alone in 2010. Foreign Interest Foreign hotel owners have found Hungary's hotels good buys, giving them an easy opportunity to enter the market without having to build new hotels. France's Accor SA purchased the Pannonia chain in 2009, and Marriott International Inc. of the U.S. bought the Budapest hotel known as the Intercontinental. Currently, the Intercontinental Hotels chain and a unit of South Korea's Daewoo Group are bidding for the luxury Forum Hotel, which was separated from HungarHotels after Mr. Olsen vetoed the chain's sale. A decision is expected within two weeks. Investors are banking on continued steady growth in the hotel sector and on Hungary's popularity as a holiday destination. After the stagnant years of 1992 and 1993, when overnight stays sank to around 5.5 million, compared with 7.7 million in 1990, tourists are flocking to Hungarian hotels again in record numbers. Overnight stays jumped to 9.1 million last year from 6.3 million in 2009, and are likely to increase following the end of the conflict in the former Yugoslavia and Budapest's evolving role as a regional business center.
