Luxury hotel group Rosewood looks set to be floated on the US market, potentially raising around USD400m.
The move, which will split Rosewood off from parent, property developer New World Development, is expected to use not an IPO, but the more swift and simple SPAC route. The company is reported to have hired Credit Suisse and JPMorgan to help set up the process.
The revelation comes as Rosewood revealed details of its second hotel in London. Rosewood Chancery will be created in the landmark former US embassy building in the city’s Grosvenor Square. The 139–room property is being created in partnership with landlord Qatari Diar, and is expected to open in 2024.
A SPAC, or special purpose acquisition company, allows investors to set up and fund a shell company via an IPO. Often, the SPAC is supported by institutional or private equity investors, who put their money in. The shell then seeks out and acquires a target, which may then pass its name on to the SPAC.
SPACs have become a hot trend on Wall Street, with around 200 such vehicles deployed in 2020 to help bring new companies to the market and raising around USD64bn. They are particularly in favour in times of market volatility, as they are generally faster than an IPO, and the valuation of the acquired company comes in for less scrutiny.
But not everyone is a fan of the model, and plenty are warning of a bubble in the US, which is leading with the phenomenon. Research suggests that an IPO, on average, offers superior returns for investors, while others worry that the SPAC’s promoters are essentially conflicted in negotiations with the target acquisition, and so less likely to ensure a tight price for the deal.
New World, which is listed in Hong Kong, has interests in real estate development, infrastructure and insurance, department stores in mainland China, and in hotels.
Rosewood currently has 35 hotels, in 19 countries. Its luxury Rosewood brand accounts for 27 of those, and a further 21 in development. In China and southeast Asia, the group has New World hotels, while it has also launched KHOS, a lifestyle brand.
“I think it’s a really interesting strategy,” said Danny Farrugia, a lawyer at Aequus Counsel in Sydney, with extensive experience in SPACs. Typically the model is used for tech businesses, “but putting a conventional business into it is a bit different.”
Farrugia said SPACs will remain popular “whilst they bring the advantages they presently offer and are sponsored by financial rock stars with good track records for picking winners.”
“It’s the sponsorship with a track record that makes them attractive to investors, combined with the rise of the start-up unicorns not only in the US but all around the world from Beijing to Bangalore and London which offer promise. I do a lot of work in India and the amount of private equity and fund money going into start ups there is eye watering.”
The US offers liquidity and greater flexibility than that currently offered on the Hong Kong or European markets, said Farrugia.
For Rosewood, the issue is growing the brand’s presence to a size that can capture the luxury traveller around the world. “They will miss out on a lot of opportunities if they don’t scale up. For example, right now Four Seasons and Ritz Carlton each have more than 100 hotels globally.”
Among those invested in the US SPAC waiting game is hospitality investor Hugh Osmond. Osmond, who has previously been involved with restaurant chain Pizza Express and pub group Punch Taverns in the UK, and has hotel interests in the UK, has raised USD300m in a SPAC called Broadstone Acquisition. The vehicle is looking for European opportunities, though Osmond recently warned: “There’ll be some incredibly good deals done, and there will be some very bad ones – at some point, in the future, the market will calm down and mature.”
Another luxury hospitality brand mulling a US listing is private members club Soho House. Founder Nick Jones, despite telling the Sunday Times recently “it’s not a pressing issue” is eyeing a USD3bn valuation for the business.
An IPO would provide potential additional capital to support a global rollout of the brand, while also adding flexibility for current backers. US hospitality entrepreneur Ron Burkle holds 55% of the group, British restaurateur Richard Caring has 25%, while Jones has 8% and backer Raycliff Capital has 5%. During the last two years, Soho House has pulled in GBP150m of additional funding, in two rounds led by Raycliff, and Burkle.
Soho House currently has 27 sites globally, being a mix of clubs and hotels; with a further 20 locations targeted. As well as the clubs, a Soho Works coworking brand is also being developed. The company has also spent GBP60m on digital development, including a major app for the brand that provides not just digital management of membership, but also aims to build community involvement.
Jones has said that future additions to the portfolio will be on an asset light basis, with Soho house paying rent to landlords who will find and develop sites.
HA Perspective [by Chris Bown]: The money’s out there, and in the US right now, there’s plenty of hot money going into SPACs – some say too much. Price the offer right, and Rosewood could soon find itself listed, and with access to broader capital that could support its existing pipeline, and open up further opportunities to add to that by backing more developments itself.
Having won the new high profile London site, Rosewood’s got momentum. A deftly executed SPAC could send it on its way.
Additional comment [by Andrew Sangster]: Back in 1996, I wrote about six UK IPOs or fundraisings in the hotel sector. It was a bullish period that had caught light at the end of 1995 when Granada launched its hostile takeover of what was then the UK’s largest hospitality company Forte.
The bitter GBP3.9bn battle for Forte, which closed in January 1996, highlighted the potential of the hospitality sector and boosted investor interest that paved the way for the hotel listings. The brief period in the sun drew to a close when Principal Hotels pulled its intended float at the end of the year.
Subsequently, rather than IPOs, the main topic when it came to the stockmarket was privatisations. Privately held real estate investors spent the latter half of the 1990s taking advantage of the arbitrage between publicly held real estate and publicly held.
Public companies were more limited in the amount of leverage than could obtain, and this gave them a disadvantage against private players. It was not a sophisticated investment strategy – take the public company private and split out the property from the operating company, then leverage up the property company to extract your initial investment, paying down the debt with the operating company cash flow.
It was an intriguing problem. Hospitality was a huge and growing industry, yet more and more of it ended up in private hands. Even those companies that stuck with a listing embarked on a shrinking exercise, notably IHG which shed USD10bn of real estate.
An efficient market would surely see more of the hospitality industry held in the cheaper cost of capital offered via the stockmarket. But the quirks of how investors saw hospitality real estate meant that stockmarkets only really made sense for operating companies.
We are now embarking on a new era. One where investors are explicitly linking real estate investment to the business that pays the rent.
Perhaps, in this new regime, the need to access the cheaper cost of capital available via public listing will create a new raft of hospitality and operational real estate companies seeking IPOs.