Is Four Seasons Throwing Caution To The Wind?William C. Symonds
Isadore Sharp, the perfectionist CEO of Four Seasons Hotels Inc., doesn't have much regard for conventional wisdom. While his rivals piled on debt during the booming 1980s, Sharp followed a much more cautious approach, not wanting to jeopardize the company he founded in 1960. At times, even many of his own employees criticized his caution, he says. But now, with the hotel industry in a pronounced slump, Sharp is making his boldest move ever: In early August, Four Seasons will pay $122 million for the rights to manage the Hong Kong-based Regent International Hotels Ltd. empire. When the hotels now being built are complete, Toronto-based Four Seasons will manage 43 hotels in 17 countries. "It makes us, instantaneously, the dominant high-end hotelier worldwide," Sharp crows.
On the surface, Four Seasons doesn't look like a company that should be on the prowl just now. The industry's problems are taking their toll. Last year, Four Seasons' net earnings fell for the first time since it went public in 1986, tumbling 84%, to $2.3 million, on revenues under management of $524 million. The main reason: Its hotel ownership business, which holds stakes in 14 Four Seasons and accounts for about a fifth of the company's revenues, had an operating loss of $10.2 million. The balance of Four Seasons' revenues comes from the hotel management side, where operating earnings fell 8%, to $10.4 million last year.
Things aren't looking much better this year. For the quarter ended Mar. 31, the company reported a net loss of $2.7 million. Meanwhile, debt is mounting: The Regent deal will double Four Seasons' borrowings to $213 million, or 57% of total capital.
TOP-NOTCH. But for Sharp, 60, the Regent deal was too tempting to resist. The luxury chain, owned by Japan's financially reeling EIE International Corp., offers Four Seasons an instant presence in Asia, a market where it is little-known. As part of the deal, Four Seasons gets a 25% stake in the Regent Hong Kong, often ranked as the world's top hotel. "This gives them an exposure in Asia that would have taken years to develop on their own," says William Sumpton, an analyst with Loewen, Ondaatje, McCutcheon & Co., a Toronto securities firm.
Perhaps most important, the Regent deal will help Four Seasons sharply reduce its exposure to the hotel ownership business. In addition to taking over management of Regent, Sharp is placing Four Seasons' stakes in six hotels into a new, as-yet-unnamed company. EIE will contribute its stakes in either five or six Regent Hotels. Because of the hotels' differing values, Regent will get 81% of the new partnership and Four Seasons will own just 19%. Thus, Four Seasons won't have to consolidate results, and its financial statements ought to be dominated by more stable management earnings. Executive Vice-President Roger Garland figures the Regent deal will boost Four Seasons' revenues by 55%, to more than $820 million.
Four Seasons executives contend that they have structured the deal to protect their company from financial risk. EIE will be responsible for all the losses of its six hotels in the new company, including the opulent one now under construction in hotel-glutted New York, for the next five years. After lengthy negotiations, EIE and Four Seasons have agreed to limit the debt of the 12 hotels within the new company, shouldering the rest themselves, so the debt can be easily sustained by ongoing operations, assures Garland.
Logical as the strategy sounds, however, Four Seasons has some big obstacles to overcome. First, it must open and then run six luxurious hotels now under construction in a difficult market. Foremost among them is the new Four Seasons New York, which hotel broker Stephen Brener calls "by far the most expensive hotel ever built in this city." Built by Regent, the I. M. Pei-designed palace cost more than $1 million per room. Before the deal with Four Seasons, it would have had to charge more than $1,000 a night to recoup EIE's investment, says hotel consultant Laurence Geller. Now, it won't have to. Still, experts figure the hotel will be lucky to get $400 a night. The hotel market "is a disaster that is not going away," says Morris E. Lasky, CEO of consultancy Lodging Unlimited Inc. He doesn't see an upturn much before 1995.
UNSTAFFING. To make the most of his investment, Sharp has to get a handle on Regent's costs. A typical Regent employs three to four staffers per guest room, about twice the Four Seasons level and many times the industry average. But rising Asian labor costs have made this brand of effusive hospitality increasingly uneconomic. Sharp says that Four Seasons will retrain Regent employees to "do more on their own initiative," reducing the need for huge staffs. But Four Seasons runs the risk of sacrificing Regent's legendary quality or alienating its employees. The company is "in for a big shock" if it tries bringing a "North American mentality" to Asia, says a top Hong Kong hotel executive.
There is also the potential for clashes between Four Seasons, eager to expand globally, and EIE's worried bankers, who have had the company under their thumb since early 1991. Some friction between the companies was apparent even during the preparation of this article: Although Four Seasons made all of its top executives available for interviews with BUSINESS WEEK, the Japanese company refuses to comment until the deal closes. "This deal is a bold experiment," says Geller. "You wonder if it is going to be synergistic or destructive."
In its glory days, EIE was just the sort of flamboyant enterprise Sharp wanted to keep Four Seasons from becoming. The Tokyo company, which built an $8 billion empire loaded with $7.5 billion in debt, focused heavily on luxury hotels. With a 30% stake in Regent, it launched an expenses-be-damned expansion program. Those projects, now nearing completion, include the conversion of a former 14th century Milan monastery into a 98-room hotel, and a resort in Bali featuring 147 Indonesian villas, each with its own pool and lanai.
But its borrowings finally got the better of it. On July 16, EIE, now being run with the help of Long Term Credit Bank of Japan Ltd., suspended interest payments on some $4 billion of debt. Meanwhile, EIE hopes to sell about 40% of its $5.5 billion in overseas holdings. But it didn't want to sell its seven Regents in the slumping hotel market. After buying out Chief Executive Robert H. Burns's 65% stake in Regent, EIE retained First Boston Inc. to find a new buyer to manage the chain and take a stake in the Regents owned by EIE. Four Seasons signed a binding agreement on June 19.
One thing the chains do share is great service. Four Seasons offers everything from immediate clothes pressing to special tea service and kimonos for Japanese guests. The company is developing a global network to keep track of visitors' preferences, down to such details as their favorite type of pillows. Regent, judging from various surveys of hotel guests, does an even better job. From the cloth cocktail napkins to the employees who unfailingly remember guests' names, travelers almost universally describe Regent as tops in pampering.
Given that worldwide reputation, many believe Four Seasons is gaining management control for a song. "It's a once-in-a-lifetime opportunity," figures analyst Tony Tsoi of Sanwa McCarthy Securities Ltd. in Toronto. He won't get any argument from CEO Sharp. Just the same, it's probably a good thing he went slower than most in the frenetic 1980s: Making this deal work smoothly could be a once-in-a-lifetime challenge, too.