Why mergers could rescue struggling hospitality sector

Managing Director PrideInn Group Hasnain Noorani after signing Revenue sharing module to beat the challenges of management. [Jonah Onyango, Standard]

The Covid-19 pandemic has been a season of drought for the hospitality industry owing to the number of facilities forced to close doors.

As the tourism industry crawls back to health, it has become apparent for businesses to find ways of not only staying afloat but also guaranteeing a safe passage through the recovery period; one which is marred by uncertainties of the Russia-Ukraine crisis, high cost of living and the upcoming General Election.

One way of survival is merger and acquisition. Last week, PrideInn Group announced it had taken over the management of the four-star Plaza Hotel located at Signature Mall, off Mombasa Road in Machakos County.

The hotel, acquired from Azure Hospitality Group, is now rebranding to PrideInn Plaza. PrideInn Group Founder and Managing Director Hasnain Noorani said the group is taking over the hotel under the ongoing contract from Azure Hospitality Group.

The contract will see PrideInn manage the hotel for Azure Hospitality Group, which will be paid a monthly income. “It is very similar to a lease model except that the monthly lease amounts vary based on the percentage of total top-line revenue generated by the hotel, determined using global hotel software,” Mr Noorani said.

A report authored by consulting and audit company Ernest & Young (EY) and Bowmans, a commercial and corporate law firm titled Hospitality Series (Acquisition of Hotel Assets, notes that there have been some notable mergers and acquisitions despite the negative impact of the pandemic in the sector.

“International investors have taken the advantage of the impact of the pandemic to enter the market and or expand their footprint in Kenya,” reads the December 2021 report.

The report documents the acquisition (concluded in 2020) of Fairmont Mara Safari Club and Fairmont the Norfolk by Chaudhary Group, headquartered in Nepal, from Kingdom Hotel Investments as the most notable of such transactions in the sector in a deal estimated at Sh2.8 billion.

The other is the sale of Fairview Hotel by City Lodge, which as of June 2021 reports indicated that it was being bought by Actis, a private equity fund, for Sh1 billion.

The report notes that the rise of distressed hotels in the market over the last one and half years has been rising. “Hotels and lodges across the country have experienced unprecedented pressure on their revenues,” it says.

“However, the pandemic has also uncovered strategic and operational issues in the sector that materialised well before the pandemic but have contributed to a large number of distressed assets in the market.”

Overdependence on foreign clients and unsustainable pricing models are some of the challenges the report adds were unearthed in the industry as a result of the pandemic.

The pandemic led to the closure of hotels including InterContinental, Outspan, Treetops Lodge, The White Rhino, Norfolk, and the latest being Hilton.

The report attributes the closures to several factors, among them an unpaid debt that was behind Intercontinental’s woes. “At the heart of the issue is the lack of innovation these distressed hotels and others have succumbed to,” it says.

A study titled Evaluating Covid-19’s M&A (mergers and acquisitions) Opportunities published in 2020 by hotelmanegement.net notes that while the pandemic crisis provides a significant chance for mergers and acquisitions, this should be done by hotel companies with a strong balance sheet, clear strategic vision and willingness to take disciplined risks in these uncertain times.

Mr Noorani said the management change will position Plaza Hotel as the preferred host for meetings, incentives, conferences and exhibitions in Machakos and Nairobi counties.

He said there has been a gap in this area. “With the ongoing recovery of the Kenyan economy, local and international companies have revived conferences. That is where we come in,” the MD said.

“PrideInn Plaza is strategically located to host conferences from any part of the country. The hotel has a conference capacity of more than 2,000 business executives.”

PrideInn is also banking on the proximity to the Nairobi Expressway, which has eased access to and from Jomo Kenyatta International Airport. This also extends to Nairobi’s central business district. “The hotel is also ideal for people making a stopover on their way to places like Mombasa, Amboseli National Park, Tsavo National Park and Namanga border,” Mr Noorani said.

He said the tourism sector is showing improvement in performance following the hardships of the Covid-19 pandemic.

“Since the country’s reopening in 2021, we have seen an increase in the number of tourist arrival into the country for conferences, sports activities and leisure,” he said.