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March 1, 2010 - View From The Top - Industry leaders offer opinions on trends, issues and opportunities, as well as forecasts for the months ahead.

By HOTELS

There remains trepidation and a wide range of opinions about the state of hotel industry affairs. Some of the more optimistic industry leaders say the industry is in recovery mode-even in the luxury segment-and opportunities to drive rate are finally right around the corner. Still others continue to point to a potential bubble in China, weak real estate prices and the continued threat of terrorism as hindrances to the onset of any profound rebound in hospitality sectors.

To keep the dialogue fresh, HOTELS' Investment Outlook sent questions to top hotel executives in Europe, where finance issues have recently become more acute. On the following pages, read what Orient-Express Hotels CEO Paul White, Jumeirah Group Executive Chairman Gerald Lawless, Avington Financial Chairman David Mongeau and Meridia Capital Chairman and CEO Javier Faus had to say in late January about subjects ranging from M&A and managing costs to the evolving needs of their guests.

HIO: Do you now see this moment in time as the right moment to dive in and buy assets?

WHITE: There are some interesting opportunities around, but we remain cautious on the general market outlook, so you won't see us diving in as such-more dipping our toes into the water.

The hotels we recently acquired in Sicily represented an excellent opportunity to expand our Italian portfolio into an increasingly popular part of the country, in an excellent financial deal. Hotels like Grand Hotel Timeo and its sister hotel, Villa Sant'Andrea, don't come onto the market often. It is a perfect fit with our investment criteria-the iconic status of the Grand Hotel Timeo; the location of the properties not only in Sicily, one of Italy's fast growing tourist destinations, but in Taormina itself; financial upside; and barriers to entry for new competitors.

These two great properties traded well below their potential and at RevPAR, some 70% below our existing Italian assets. The share offering helped us to finance the cash element of the deal but also gave us additional funds for general corporate purposes, including the long-awaited renovations at Hotel Ritz Madrid.

FAUS: Yes, we believe now is a good time to buy hotels. We are not property traders, and over time we focus on adding value to our hotels through very thorough asset management. But we are in a cyclical industry, and not trying to play the cycle would be foolish for us. Trading performance has always come back, and it will be no different this time.

Now, the issue is: How low should we buy? This is extremely difficult to answer. Our rule is to keep buying prime assets in gateway cities in Latin America and Europe at a 35% to 40% discount over replacement value. Even with such discounts, yields might look low if we take trailing 12-month figures. However, given that we focus on long-term appreciation, that we still have access to reasonable debt financing and that we are not a public company, we are moderately optimistic about delivering the returns that our shareholders expect.

HIO: Is there money available to develop hotels? If so, where and with whom can you source debt and equity?

LAWLESS: Our pipeline of new developments has continued to expand in spite of the recession. Including the 11 hotels we are operating today, we have more than 40 management agreements in place, and we expect to reach our target of 60 hotels either under agreement, in development or in operation in 2012.

Funding appears to be available for well thought-out quality developments and, as a hotel management company, we have had particularly positive results from China and high-end tourism destinations such as the Maldives. We also receive many inquiries from investors, owners and developers in the Caribbean and in South America.

WHITE: As you saw from our recent offering, which was more than four times oversubscribed and priced at no discount, there is an appetite for the right deals. Potential investors have to like the story and see the potential return. We have done well in the public markets in the last couple of years. Private equity appears quite quiet at the moment, and sovereign wealth possibly has too many suitors in the current climate.

FAUS: Financing development deals is an extremely complicated task these days; that does not mean impossible, though. In our Paris property [announced W project], we managed to secure financing with three Spanish financial institutions that were comforted by the fact that the asset is well located, in a key European capital city, with a top hotel brand, an excellent retailer and with a quality sponsor.

Over the last six months we have also seen quite a few examples of the public markets injecting capital into the sector-Hyatt's IPO, for instance-as well as several new industry-specific equity funds being created to invest in hotels. The dynamics of sovereign wealth funds have also changed over the last two to three years. These are increasingly professional/institutional and much more selective. They scrutinize deals more thoroughly, which we view as a very good thing. Although money in the sector is obviously not as readily available as before, it is there for quality projects.

WHITE: We see limited interest in greenfield development projects at this time. Debt providers and institutional equity currently focus on existing properties with repositioning or conversion opportunities.

HIO: Do hotel companies need to reinvent their business models to secure their pipelines? If so, how? How much damage has been done to pipelines?

MONGEAU: Almost by definition, a development pipeline-and any individual hotel's development-is in a constant state of flux until formal opening.

The financial crisis has amplified these risks and perhaps done as much damage to the management companies' credibility as to their pipeline. Hopefully, this will cause everyone to be more circumspect about when they announce a "new hotel development."

In other industries, such as oil and gas, accepted standards such as 'proven and probable' impose a discipline on these types of announcements. For hotel developments, availability of financing is a fundamental condition-always has been and always will be. If everyone was a bit more mindful of this, the aggressive pipeline statements might be put in perspective.

WHITE: Reinvent is probably too strong, as at the end of the day, the hotel business is a relatively stable business model. The balance of power between owner and operators continues to move, and it is our view this trend will continue, with owners' demands becoming more specific as they have a greater understanding of the industry.

FAUS: Rather than how much damage has been done to pipelines, perhaps the question should be how much damage have pipelines done to the industry. Easy financing and brands eager to expand led to a spur of development deals worldwide that was heading in the wrong direction. I mentioned before that owners should deploy more equity and accept more modest returns. By the same token, operators should learn to live with lower pipeline figures and with a more balanced sharing of risks. It is easy to say, but difficult to implement-especially for public companies scrutinized on a quarterly basis.

HIO: What are you doing to best manage costs and grow revenue?

WHITE: There are always opportunities to reduce costs; the secret is ensuring that they do not impact negatively on the customer experience and maintaining the savings once the initial crisis has passed. Our team has excelled in the art of managing costs, but the challenge now is to build revenue. We are pretty creative about offers to entice our guests to travel or return, but it is never enough. Like everyone else, we need to get better.

FAUS: Owners need to be more conservative on their financing, deploy more equity and expect lower returns in an industry that continues to be long-term. Brands need to understand that risks should be better shared with owners. And banks will force some changes in management contracts and in owner-operator relationships.

Brands have been good at cutting costs aggressively at a corporate level. What is interesting to see is that they can do the same now with 30% to 40% fewer staff. The goal for brands is to transfer those same efficiencies to the hotels' back office. Without affecting service or brand standards, hotels can be run more efficiently.

Being more specific, several actions can be taken: Make sure that you have the best GM (a poor GM is a bad business regardless of the brand); protect your existing customer base as much as you look for new business; if your cash flow allows you, keep investing in marketing and in regular capital expenditure-in essence, be prepared for when the cycle turns and challenge your operator with best practices from other brands. In this cycle, we have managed to understand pretty well with which operators we wish to keep doing deals when the climate changes and which operators for which we have had enough.

LAWLESS: Our commitment to quality is essential with regard to maintaining our loyal customer base. We have insisted on maintaining our employee-to-guest ratio in the guest service areas. The areas in which we have introduced initiatives to manage our costs include the introduction of energy conservation measures, which is particularly important in Dubai, and the intelligent recycling of water. For example, we continue to source innovative solutions on both fronts with engineering and energy companies and have a number of pilot schemes in place to operate in a way that is both environmentally and economically smart.

MONGEAU: Avingstone's business model is to have our asset managers work cooperatively with brand managers and, hopefully, allow everyone to benefit from our investors' previous experiences with multiple brands, particularly with repositioning F&B operations as an aid to drive RevPAR enhancements.

HIO: Have market conditions put an end to brand proliferation?

WHITE: It may have put an end to the sort of new brand launches which have not been fully thought through. Guests know what they like and what they are willing to pay for. Generally, that is about the kind of experience they want from their hotel, and while there will always be gaps in the market for innovation to fill, I think the marketplace got a bit crowded for a while and customers couldn't see a tangible difference in some cases.

FAUS: A break, rather than an end, perhaps. The market was growing so rapidly that it was difficult to keep up with the large number of new brands invading the market. Guests had virtually no time to digest and differentiate the numerous new names in every segment of the hotel marketplace. In difficult times like these, we at Meridia have decided to bet and invest in existing strong brands, rather than in new ones. Globalization, the Internet and the online travel agents will also favor the strongest players.

MONGEAU: Not market conditions, in and of themselves, but when taken in conjunction with increasing customer 'brand fatigue,' perhaps we will see hotel companies return to a focus on core brands and strengths.

HIO: How is product adapting at the luxury level given the "new frugalness" of consumers?

MONGEAU: We are always careful to distinguish between 'false economies' and 'true value,' especially at the luxury level where we are focused. Elimination of frivolous amenities and services is obvious and should never have been allowed to creep in.

Today, for corporate executives on increasingly compressed travel and meeting schedules, true value lies in the enhanced efficiency that they obtain from a properly run, conveniently located luxury hotel, with concierge, business centers, 24-hour roomservice and other important services. They don't view this as 'luxury,' but rather as essential to their business performance as their BlackBerry is.

Similarly, for the luxury leisure traveler, if the pressures of business and the economy mean that they can vacation less, they want to ensure they have the best leisure experience possible when they do. Rarely is this a question of frugalness; it is almost always about the quality of the experience.

LAWLESS: Demand for luxury will continue, but we recognize that the needs of the market are evolving. Especially in the leisure sector, guests are looking to enhance their overall well-being and life skills when on vacation. One of the ways we are responding to this new need is to offer opportunities to connect with the local culture. For example, we offer guests Arabic cooking classes at the facilities of the Emirates Academy of Hospitality Management; insights into crafts, arts and other cultural activities in the local community; and we engage them directly in some of our corporate social responsibility programs. This allows them to enjoy luxury, but without the guilt.

WHITE: It is no longer about wealth or bling. Now it is about how our guests live their lives. It is about authenticity, elegance and understatement and attentive personal service. It is all about knowing your guests and understanding what they want.

FAUS: Don't be wrong. Regardless of what you call frugalness, luxury guests still demand a perfect product at the room level. In our view, what are not needed anymore are those lavish and overly expensive public and restaurant areas. Great personalized service is much more relevant than chandeliers, and that is where a good or bad GM/brand can make a huge difference.

HIO: What are you doing to best position yourself for a pending upturn?

MONGEAU: We are making sure that we factor in extra capital expenditure, to be deployed immediately, in any acquisition we are reviewing so that we can ensure that the hotel will be in the best possible physical condition as the cycle upturns.

WHITE: We have been working to position ourselves for the upturn for a good 18 months now. Initially it was about cutting costs, paying down debt by raising funds, disposing of non-core assets and selling developed real estate. The last two still apply, and you will see us continue to make progress in those areas, but now we are back to a strong focus on revenue generation.

FAUS: We are still in a buying mood but, as stated earlier, we will only consider prime urban assets with an important discount over replacement value. On our existing portfolio, we keep investing in all properties. Our four hotels in Latin America have either been partially redone or will go through some type of redo over the next 12 months. We are adding new F&B concepts, creating buzz in the hotels' lobbies, etc. They will all be ready to fight for business when the cycle turns. We have always been of the opinion that money should be on the field. But that as far as operators understand that, they need to be extremely efficient at the back of the house and with matters that do not affect brand specs and service.

LAWLESS: Jumeirah is very active in the development field, and we are continuing to build our development teams in Asia and the Americas. All the feedback from the market tells us that the Jumeirah brand is in high demand as a luxury hoteloperator, having established our credibility through the management of our hotels in London, New York and Dubai. We also look forward to the imminent opening of Jumeirah Frankfurt in October 2010 and Jumeirah Messilah Beach in Kuwait, as well as Jumeirah Hantang Xintiandi in Shanghai later this year.

HIO: Talk about some recent surprises in development and performance.

MONGEAU: On the development side: the sudden lack of interest in Caribbean resort developments/residential. On the performance side: the strength of the London and Paris markets.

WHITE: I prefer not to have surprises. The recovery in demand from the U.S. in the second half of 2009 was a highlight, as was the purchase of our properties in Sicily. We have also been delighted to be able to sell non-core assets at 20-times EBITDA.

FAUS: The Crowne Plaza in Santiago has been a fantastic experience for us. It is an old hotel, which is not located in the heart of the new Santiago. However, thanks to a full redo last year and to extremely focused management, it has outperformed the market the last three years. In a very challenging environment, NOI in 2009 closed higher than in 2007.

As a negative surprise, we are facing a rather painful development process in Paris. Honestly, we never thought that the city would be so challenging. The project is extremely demanding, very slow and time-consuming. It requires a lot at every level. We are putting a great deal of effort into it to ensure it becomes a true success. Having said that, I can only add that looking forward, it is a major deal that we are all very excited about. Now we understand that once you have a prime hotel and retail asset up and running in the center of Paris, you have a jewel for life.

HIO: When will real estate hit bottom?

FAUS: We believe 2010 will see the bottom of the cycle.

LAWLESS: I believe that the real estate sector has already bottomed out, and I expect activity in hotel transactions to start turning around by the end of 2010.

MONGEAU: It varies by market segment and jurisdiction. Some say that London's luxury hotel real estate merely stopped increasing for a brief period.

WHITE: Pass me your crystal ball.

HIO: What is your forecast for 2010 and beyond?

FAUS: Within our portfolio we are expecting a better 2010. That is because Brazil is up-Chile, too, thanks to higher commodity prices and the new elections-and Mexico saw the very worst in 2009 because of the swine flu and the huge impact of the U.S. recession. Overall, we believe that the industry will not recover until 2011 and that we will not see 2008 RevPAR levels until 2013-2014, depending on the markets.

We expect the luxury segment to recover more strongly than others. It is more volatile and, therefore, it is reasonable to assume that, after having suffered more severely, it will show a stronger comeback. Luxury will also benefit in this coming decade from reduced supply. These days, with financing restrictions and without the support of branded real estate ancillary in the hotel project, it is extremely complicated to develop luxury hotels.

MONGEAU: From our due diligence investigations on targeted properties and anecdotal comments from Avington's advisory clients, RevPAR appears to have stabilized in most of our target markets, with some showing nominal occupancy gains but no major rate increases.


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September 23, 2009 - Formation of The Avingstone Fund

Dear Friends

We are pleased to announce the formation of The Avingstone Fund, a club fund focused on the European hotel sector recovery. While our preference would have been to maintain a low profile in advance of a formal public announcement, a story in today's Financial Times has referred to the fund.

As many of you know, core to the Avington business model is assisting with all aspects of our clients' strategic and M&A objectives, including co-investment in instances where it is helpful. We also believe fundamentally in the long term prospects of the hotel industry and that now is an opportune time to demonstrate that commitment by seeking investments in European assets. A select group of investors who share these views have made some meaningful commitments to The Avingstone Fund with the objective of working with us and our client base to pursue these opportunities.

The Fund will be independently managed by Avingstone GP, a joint venture between our affiliate, Avington International, and a lead investor.

Avington Financial remains keenly focused on offering the highest quality investment banking services with the exclusivity, integrity, independence and primacy of client interests that have always distinguished us.

We look forward to keeping you apprised of the development of the Fund and discussing how we can continue to be of assistance.

Click on the following links to read the Financial Times article and our formal announcement.

All press enquiries should be directed to our public relations advisor, David Tarsh at telephone: +44 (0) 207 602 5262 or via email at david@tarsh.com.

Regards

David C Mongeau
Chairman & Founder
Avington Financial


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November 27, 2008 - Hotels Keep Door Shut to Big Rate Cuts

By Roger Blitz, Financial Times

US travellers hoping that the global financial crisis would herald bargain Thanksgiving weekend hotel deals have been finding them hard to come by. However grim the outlook for the hospitality industry, the world's leading hotel groups say they will hang on to their rates come hell or high water.

The impact of the 9/11 terrorist attacks on the industry is the reason why. Stephen Holmes, chairman and chief executive of Wyndham Worldwide, which operates 7,000 hotels, recalled how the collapse in trade prompted hoteliers to slash rates in a bid to drum up business. Not only did it fail to do so, it also made it impossible to restore rates to pre-9/11 levels when the recovery was underway.

"Since the financial success of a hotel is largely driven by the hotel's ability to 'yield manage', which means balancing price with occupancy, aggressive discounting is not a good formula and often leads to failure," he told an audience of travel executives in Las Vegas last week.

The hospitality industry is braced for pain. Revenue per available room - the industry benchmark - fell 7 per cent in October in the US, compared to the prior year, and is getting worse, according to Smith Travel Research. The week ending November 15 saw a decline of 13.2 per cent.

Hotel groups expect some easing of rates, but will fight against drastic reductions. Average daily rates in US hotels in October fell 0.5 per cent, the first fall since June 2003. But empty hotel rooms can be preferable to big drops in rates.

That puts a strain on the relationship between hotel owners and the groups that operate them, such as Wyndham, InterContinental Hotels Group, Starwood and Marriott.

Hotel groups have "de-risked" their businesses by adopting an "asset-light" strategy, selling off the bricks and mortar to a range of buyers and in return becoming the owners' operators under long-term agreements.

But with the share prices of hotel groups suffering - shares in leading groups have fallen 50-75 per cent in the past 12 months - one hotel owner has raised doubts about the strategy.

"All of these asset-light strategies haven't really worked," said Javier Faus of Meridia Capital, a Barcelona-based private equity company that owns hotels run by Crowne Plaza and Ritz-Carlton and Six Senses resorts. "The market is penalising big time all of these operating companies," Mr Faus told a Deloitte hotel investment conference in London. "This should open the eyes of where we are going in the industry. We have transferred risk to owners. The manager is left with no risk. Has that helped these hotels' equity? No."

This is a market that does not discriminate between hotel owners and operators, as shown by the tumbling share prices of US real estate investment trusts such as Strategic Hotels and Host Hotels.

But according to Arthur de Haast, chief executive of Jones Lang LaSalle Hotels, the operators are not as exposed as owners to big changes in income. "Net profit of owned hotels could be falling 20-30 per cent over the next several months. The operators have insulated themselves to a degree from volatility," said Mr de Haast.

"The question is, did they sell off to the right partners who used sensible financing structures? They don't want to be finding that a number of hotels are in financial difficulty."

Nor do they want to see a slowing in their development pipelines which underpin their growth strategies. But with credit markets frozen, this is now happening. Even though a declining market might be a good time to halt supply, the market is treating this negatively.

"For IHG, the triple whammy is declining demand, rising supply and falling property values," said Nigel Parson of London-based analysts Evolution Securities. "That should combine to form an ugly 2009."

IHG, the world's biggest group by hotel rooms, said its business model was robust. Its owners understand the importance of yield management, said Leslie McGibbon of IHG, and know that IHG has a marketing war chest of $1bn. "You might see an acceleration of non-branded hotels falling to brands," he said.

The big shadow looming over the industry is debt. "The real concern in the marketplace is whether these owners will be able to refinance," said David Mongeau of Avington, an M&A hotel specialist.

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August 1, 2008 - Private Equity Checks Out, Acqusitions Monthly

By Quentin Carruthers, Acquisitions Monthly

After a restructuring phase, how is the hotel and hospitality sector placed going into the downturn and where are the deals?

The high point for M&A in the hotels and hospitality sector was reached on July 1 2007, with the announced US$26.7bn acquisition of Hilton Hotels by US private equity firm Blackstone Group. In every way – size, quantum, price, global risk appetite – the Hilton deal was the biggest ever acquisition, and looks likely to remain so for some time.

Despite being a peak time deal – a stigma that can carry certain doubts over true value – the Hilton transaction remains well perceived.

“Hilton as a brand is an exciting place to be, delivering a US brand into the global market place,” says Richard Candey, director in the hospitality division at real estate adviser DTZ, who reckons that the success or otherwise of such a transaction cannot be tested for at least another two or three years.

Opportunities Lost

In 2007, private equity firms were in the vanguard of deal-making. According to a survey by HVS, the specialist hotel, restaurant and leisure valuation consultancy, 44% of single asset and hotel portfolio investments made in 2007 were by private equity firms, with Blackstone leading the pack. In 2008, a year that has yet to be evaluated, private equity firms appear to have slipped closer to zero involvement.

Of course, the retreat of private equity comes down to the credit crunch and the drying up of leveraged debt. Now, though, there is frustration that banks have become over-cautious.

Bruce Parmley, co-director of the real estate and hospitality practice in the Washington office of law firm Hogan & Hartson, laments that underwriting banks are scared of their own shadows, that credit committees are crossing every “t” and dotting every “i”, all leading to a loss of common sense.

Parmley has lived through previous cycles and sees no immediate end to this one, saying: “What bugs me about it this time is the impracticality.”

Candey of DTZ says that opportunities are being lost because of the heightened level of diligence required by credit committees. “Banks are flying the flag that they are open for business, but the reality is that they are being incredibly selective, and their choices are reflective of profitability and relationships,” he says. “Any hotel portfolio transaction over £75m is proving incredibly difficult to fund.”

For those deals that do secure finance, the terms of debt have tightened and tenures have shortened from around five or seven years to three years.

Cristina Badenes of Barcelona-based private equity hotel investor Meridia Capital, which recently surveyed 12 banks and two hotel consultancy firms for a report on debt markets and hotel financing published in June, says “financing conditions have undoubtedly hardened”.

In her report summary, Badenes concludes: “Loan-to-values have come down by at least 10 percentage points, risk spreads have increased by around 50–100 basis points and club deals have become more common as visibility in the syndication market has been reduced.”

She goes on to describe the problems typical across other sectors – such as the cautious approach adopted by credit committees – and says, furthermore: “Most banks consider that we have not yet reached the bottom.”

Encouragingly though, Badenes adds: “Most financial institutions still consider that hotels remain an accepted asset class among the investment community and the current turmoil in the world’s financial markets will not change investors’ perception of the sector.”

Fresh Capital

According to Parmley, there is now enormous potential to enter the mezzanine debt market and fill the widening gap between equity and debt – an opportunity not just for third party lenders but for hotel operators themselves.

“Mezzanine capital can come from the hotel operators,” he says, adding that mezz is happening and will continue to happen.

More widely, the search is on for new providers of capital.

“The search for buyers is increasingly eastwards, towards Central and Eastern Europe, Russia, and the Middle East,” says Nam Quach, co-head of European lodging and leisure, investment banking division at UBS, explaining that high net worth individuals and sovereign wealth funds and their related entities are examples of buyer groups who, for the right asset, remain keen to acquire in today’s market.

In fact, rich people, either self-made or with dynastic wealth, have always played a role in the hospitality sector. HVS found that high net worth individuals accounted for 7% of investment activity in 2007.

The leader of the hotel investor rich list is Prince Al-Waleed Bin Talal of Saudi Arabia, chairman of Kingdom Hotel Investments, although some bankers would view him as the face of a sovereign wealth fund, another class of investor showing an increased interest in hotels.

Other rich investors in hotels include Microsoft founder Bill Gates who, through his Cascade Investment vehicle, joined forces with Talal to back a US$3.7bn MBO of the Four Seasons Hotels in November 2006.

Even Roman Abramovich, the Russian owner of Chelsea Football Club, can be viewed as an investor with a taste for hotel-like properties following his recently reported purchase – confirmed so far by the cleaning lady – of the world’s most expensive and supposedly most desirable property, La Leopolda.

The US$500m chateau on the French Riviera near Monte Carlo was built for the mistresses of King Leopold of Belgium, and has already passed through the hands of Bill Gates and Gianni Agnelli.

Looking westwards, towards the US and Canada, bankers hope to see lost credit supply replaced by the increased involvement of pension funds, following the lead of Canadian pension funds such as Ontario Municipal Employees Retirement System (OMERS), British Columbia Investment Management Corporation (bcIMC) and Caisse de dépot et placement du Québec, which have all begun investing in hotels.

The Hotel Cycle

Apart from the impact of the credit crunch, hotels have their own cycle. Andrew Sangster, editor of Hotel Analyst, describes the volatility typical of upscale hotel chains.

“It’s a wildly cyclical industry, exhibiting the classic features of luxury goods – overshooting on the upturn, undershooting on the downturn, but over 20 years providing the best return of any real estate asset class,” he says.

However, as Sangster can testify, the industry has been through a long phase of separating the bricks (the real estate) from the brains (the hotel brand operators), a restructuring essentially, which has helped reduce volatility.

Initiated by Marriott in 1993, the process was taken up more thoroughly by Intercontinental, concluding with several large portfolio sales in 2006. Intercontinental now retains the real estate of just a handful of trophy hotels in “gateway” cities, although there are reports that its New York hotel property may be sold and replaced by a new building.

Hilton, acquired by Blackstone, remains a mixed bag of owned and divested properties.

In the more defensive, less volatile budget hotel sector, a similar and very profitable bricks/brains split – or “bifurcation” as others call it – was carried out at Travelodge by private equity firm Permira, which first sold off the property to investors including Sir Tom Hunter and then sold the branded operations to Dubai International Capital in August 2006 for US$1.2bn.

Travelodge is the main competitor to the UK’s number one budget hotel operator Premier Inn, owned by Whitbread, which by contrast retains ownership of the vast majority of its properties – considered not such a great liability in the budget sector, but still looking like a bifurcation ripe to happen.

Nam Quach at UBS believes that the hotel sector’s increasing shift in business model, from owned and leased assets (where the assets, under some accountancy regimes, remain a balance sheet liability) towards management contracts and franchises, has left hotel companies with less debt and more earnings stability.

“Furthermore, the hotel sector is more sophisticated now, with much better yield management systems – like low cost airlines – and the flexibility to switch focus between business and leisure customers,” says Quach. “The industry is cyclical, but has proven before that it can bounce back quickly.”

Ultimately, with its more stable brand-based focus, the hotel management sector has its long-term sights set on rolling out rooms into a highly fragmented market, where in the US, just for example, 70% of hotels are reported to be so-called “Mom & Pop” owner-operator businesses.
Fairmont versus Carl Icahn

One merger story that illustrates well the pressure faced by hotel businesses before the credit crunch is that of Fairmont Hotels & Resorts, the hotel management business headquartered in Toronto, Canada. Originally a rail company, it was based on a string of sumptuous hotels built out along the Canadian Pacific rail line in the nineteenth century.

Trouble struck in 2005. After making two strategically important acquisitions in 1998 and 1999, which consolidated the group’s new global hotel focus, Fairmont failed to seal a third acquisition, that of Raffles. Instead, private equity investor Colony Capital – which was able to access leveraged debt far more cheaply than publicly traded and credit rating-constrained Fairmont – won the deal.

Activist investor Carl Icahn seized the opportunity, quickly building a 9.3% stake and then launching an unsolicited bid at a far higher price than the average of his purchases and applying pressure on the Fairmont board to sell assets, buy back shares or change its representation.

The mandate for lead defence adviser was given to Avington, the boutique investment bank established in 2005 by David Mongeau (previously vice-chairman of CIBC World Markets and global head of M&A, and before then a senior executive at Four Seasons Hotels) and Piers Talalla (previously senior M&A banker at CIBC World Markets, and before then at Schroder Salomon Smith Barney and Dresdner Kleinwort). Their previous client relationships included Kingdom Hotels, Colony Capital, Permira and Whitbread .

Fairmont’s defence involved an auction attended by 10 potential white knights and the eventual sale of Fairmont to a consortium consisting of Kingdom Hotels International and Colony Capital, a US$3.9bn deal struck at a 12.5% premium to Icahn’s bid price, followed immediately by a US$5.5bn merger with Raffles.

The by-then massively leveraged group had to advance its business plan quickly and shortly after deal closure Avington advised Canadian pension fund OMERS on its acquisition of a US$1.5bn portfolio of Fairmont’s Canadian hotel properties, a deal that was successfully done in September 2006 and followed in October with the acquisition by OMERS of a minority stake in Fairmont Raffles Holdings International.

Deal Activity

Isolated from the credit crunch, new-build developments in the Middle East – where each looks to be bigger and better than the other – are keeping advisers in the hotel and hospitality sector very busy.

“The Middle East is booming,” says Hogan & Hartson’s Parmley, who is involved on drawing up management contracts for the owners developing Abu Dhabi’s Saadiyat Island, the future home to a new Guggenheim, Louvre and several five-star hotel and resort attractions.

Central and Eastern Europe, while viewed as a source of high net worth individuals, is also a target for hotel brand-building and resort development.

In Bulgaria last year, for example, the State Fund of Oman bought a one-third stake for €600m in expanding the winter resort at Borovets, already Eastern Europe’s largest ski resort.

Landminster, a UK developer active in Bulgaria’s boutique hotel sector since 2001, and which is currently marketing an all-seasons hotel property in Borovets, expects any buyer to be Bulgarian, Russian or from the Middle East.

Away from the Middle East boom, there is clearly a gap between the aspirations of some owners and the harsher realities and fears felt by buyers. Richard Candey at DTZ says that certain deals remain on the block as a result of the expectation gap, such as the proposed disposal by Alternative Hotel Group of its Malmaison and Hotel du Vin hotels, which despite good offers failed to go to a buyer in 2007.

Seller expectations have been maintained by a continuing growth in occupancy rates. However, there are reports that hotel management companies are beginning to see a slowdown in forward booking and reservations in the third and fourth quarters of 2008.

London may still be holding up in terms of room rates and occupancy, but provincial UK and Continental Europe figures are said to be weakening.

Negative news may actually begin to free up deal stalemates, and one of the indicators to watch is the HotStats survey from TRI Hospitality Consulting, which reviews the business performance of UK chain hotels.

In its May review, TRI found that occupancy was steady but that profits had dipped. “Although increasing, neither room not total sales growth is keeping pace with the rate of inflation,” it said. “Hoteliers are struggling with rising costs and flat or stagnating occupancy, so the pressure on profitability is inevitable,” according to Jonathan Langston, managing director of TRI Hospitality Consulting.

Deals may also emanate from the stress on the real estate owners of hotel properties. Sangster of Hotel Analyst reckons that the imminent resetting of private equity loans will cause a “reshuffling” of hotel real estate ownership.

Banks – big investors in hotel real estate – are also expected to sell properties to help recapitalise their balance sheets, and significant potential disposals might include the likes of Grosvenor House on Park Lane, managed by Marriott and owned by Royal Bank of Scotland.

However, some banks appear to have had difficulty in selling hotel property portfolios, such as Goldman Sachs’ Whitehall Funds, which was in advanced discussions to sell its former Queens Moat Houses properties (which came out of the twice-collapsed and restructured QMH hotel business) to aAIM, the property investment company chaired by Sir David Frost. The transaction fell through towards the end of 2007 – reportedly hit by the credit crunch.

Other deals that may be driven by a reduction in banks’ real estate holdings include Spanish hotel group NH Hoteles, 30% owned by Spanish savings banks, a situation being watched by Hotel Analyst’s Sangster, who believes that any disposal could provide an opportunity for private equity funds to build stakes (given that leveraged, full takeover bids are close to impossible in the current debt markets).

Accor, the French hotel group, already has Colony Capital and TPG-Axon as significant investors on its shareholders register.

Nam Quach at UBS says that since volatility and costs associated with property have been passed over to the real estate landlords of hotel management companies, it is possible that “any transaction in the last two years could be distressed”.

Vulture-like funds have already emerged, ready for opportunities. Realstar Group, the Canadian real estate and hotel investor, has just raised €300m of equity for Realstar European Capital I fund, designed to provide capital injections into the alternative property sector, including hospitality.

Among the European hotel groups – such as Accor and Belgium’s Rezidor – deal activity is expected to continue, given their balanced approach of owned and managed assets, and the periodical real estate disposals and rebalancing of assets. They could also emerge as buyers of distressed hotel property assets.

Corporate hotel groups are ranked by industry sources such as Hotels magazine, which in its 2008 survey places InterContinental Hotels Group (IHG) as the company present in the most countries (100), followed by Starwood (95) and Accor (90), each with a differently ranked balance when it comes to hotel management and franchising.

Common to all, and driving deals and corporate strategy, is the pressure to keep feeding the pipeline of projected hotel room growth.

One class of asset that will always retain its allure is the five-star trophy asset. According to HVS, the five most expensive cities to acquire a hotel in are London, Paris, Moscow, Rome and Milan, in that order.

High net worth individuals, in particular, are drawn to the trophy hotels. However, Quach at UBS says that with any owner looking to sell a hotel in the current market, there is always the suspicion of why now?

Going into the next phase of the hotel and hospitality cycle, Piers Talalla, chief executive officer of Avington, points out that capital investment programmes are best made in a downturn, when there is lower room occupancy and less disruption caused.

Some private equity firms have hotel professionals on board who understand operational requirements, such as Morgan Stanley Real Estate, which hired André Martinez in 2006 as chairman of its global lodging practice, having been a member of the management board at Accor.

However, looking at hotel REIT structures, while some may be lauded for bringing best practice to bear upon hotel managers, they may also lack the flexibility to invest and upgrade properties in an appropriate, counter-cyclical way.

In matters such as these, Talalla describes his role as “helping clients think one cycle ahead”. And when it comes to advising on actual transactions, he compares the banker to a hotel’s concierge, saying: “If it’s legal and it’s ethical, then we can arrange it.”

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June 1, 2008 - A Tale of Two Europes

By Derek Gale, HOTELS Magazine

While leading European hotel companies like Accor and Rezidor still see significant potential for growth in Western Europe, emerging markets in Central and Eastern Europe (CEE) are what everybody, including the likes of Accor and Rezidor, is talking about.

In fact, two different industry consultants—Stewart Coggans, director of Central and Eastern Europe for Cushman & Wakefield Hospitality, and David Mongeau, chairman and founder of Avington, a London-based investment banking advisory firm—offered nearly the exact same words to describe this phenomenon. Both noted that there is currently a “huge focus on Eastern Europe” that “started with Prague” and that now “Poland is coming more in focus as a place people want to be” because it is “a gateway to developing Eastern European countries.”

That said, what do investors, developers and brands all see in the CEE? Perhaps it is the strengthening economic climate with regional GDP growth forecast at 6.6% for CEE-EU members, a drop in unemployment and an increase in disposable income throughout the region, according to Cushman & Wakefield’s MarketWatch year-in-review. Or perhaps it is the increased investment in infrastructure development by CEE governments. Or maybe the 90 million international tourist arrivals each year—driven by the presence of low-cost air carriers and Western Europeans, who are taking more frequent short breaks to the region—has something to do with it.

As if these were not reasons enough, a lack of internationally branded hotel supply in many of the emerging markets, coupled with strong growth in hotel performance, is without a doubt fueling investment and development with operators looking to secure a brand presence in key markets as early as possible.

Before getting into the breakdown of which players are developing where and why, it is important to repeat what has been said in the pages of this magazine in years past, as it continues to ring true: Throughout Europe, the potential for branding is huge. Whether through development or repositioning, chains will look to drive the hotel product ratio from about 30:70 branded versus non-branded to 50:50 or even 60:40 in the short- to mid-term.

Leaders Look To Maintain Lead

Not surprisingly, market leaders Accor and Rezidor are at the forefront of both this continental brand expansion and the expansion into CEE markets. As evidence, look no further than Accor’s rollout of the All Seasons brand (a franchise vehicle meant to affiliate a section of the mass of existing 2-star hotels across Europe), its increased holding of the Orbis network of some 70 hotels in Poland, and its desire, according to Michael Flaxman, COO of Northern, Central and Eastern Europe, to work with local partners to develop domestic chains of budget/economy hotels (think Ibis and Etap) in countries like Russia, Romania and Hungary.

Rezidor, meanwhile, will look to maintain its pole position in Russia, including expanding into regional cities, says senior vice president and chief development officer Puneet Chhatwal, while also pushing its Radisson brand from Eastern European capitals to secondary cities and its Park Inn brand into various markets across countries like Poland, Russia and Romania.

But American brands like Marriott and Hilton also are well positioned to build their brands and expand in CEE markets moving forward. Marriott already has a number of Courtyards in the Czech Republic, for example, giving the company some brand recognition in the region. And Hilton, while still in the infancy of taking its U.S.-based brands to European markets, could very quickly “become a force to be reckoned with,” as it rolls out the likes of Hilton Garden Inn to Poland, Russia and Turkey, Coggans notes.

Smaller, more regional “soft brands” like The Rocco Forte Collection, The Dorchester Collection and Steigenberger Hotel Group also continue to expand, albeit much more slowly. The Augustine, set to open this fall, will be the 12th hotel in The Rocco Forte Collection, and the second CEE property (Hotel Astoria in St. Petersburg was the first).

Steigenberger, meanwhile, recently named André Witschi, a former Mövenpick and Accor executive, chairman of the board, “to ensure the future expansion of the company,” and already has announced a new hotel on the Baltic island of Usedom.

And Dorchester Collection CEO Christopher Cowdray earlier this year mentioned two pending deals in Europe and an openness to expand into “other major European cities which show future growth.”

Hitting The Hot Markets

For brands and developers, the most exciting CEE market besides Russia and its regional cities—which is without a doubt the toughest market to penetrate—may well be Poland and its regional cities, where it is easier to do business and labor costs are low, Coggans says. Poland is seeing growth in visitors from non-adjacent European Union countries, thanks to increased flight arrivals from low-fare airlines, as well as increasing occupancies and RevPAR. Warsaw remains the primary market, but Krakow, which has limited hotel capacity, is quickly becoming a tourist destination.

Coggans also calls the Ukraine—with its lack of quality hotel stock—an “interesting” market, and says Romania, a hotel market in its infancy, could achieve a similar status in two to three years with opportunities in Bucharest and resort opportunities along the Black Sea.

Meanwhile, key capitals like Prague and Budapest that attract some leisure travel as well as business travel, while perhaps getting built out in the luxury category, hold great potential for lifestyle hotels, he says. And in terms of resorts, he also sees the Croatia coastline emerging in due course as a family holiday hot spot, especially for Russians.

Not to be forgotten is Istanbul, which is still undersupplied and in need of 3- and 4-star business hotels, and Turkey in general, a large country where regional demand is high thanks to Turkey being a popular holiday destination.

For investors, “Prague is a stable place to own a hotel if you buy the right one,” Coggans says, with the same holding true in Budapest. Warsaw, meanwhile, “has risen from the ashes” of previous oversupply to steady RevPAR growth. If he were spending his own money, Coggans would purchase “a trophy asset in Warsaw and mid-market products in the regional cities in the Ukraine and Poland, with a few in Romania.” Regional cities offer the best opportunities for pure return-driven investors, he says, while trophy assets in key capitals are the safest long-term investments.

Rushing Into Russia

Market demand, especially at the mid-market level, is exceptionally strong throughout Russia thanks to the continuing extreme undersupply of international standard hotels—both in Moscow and the regional cities. This situation drove chain hotels in Moscow to be the most profitable in Europe for 2007, according to London-based TRI Hospitality Consulting, despite low weekend occupancy (average rates, while down from previous years, still hovered around €300, making Moscow the most expensive European market, according to Cushman & Wakefield).

Needless to say, there is great interest among brands to get into these markets, but Russia is a notoriously difficult place to do business—issues like ownership and title to land slow things down and brands are unlikely to see success without working in conjunction with a proven local developer or partner with good contacts in the planning/administation system, Coggans notes.

A few examples of operators doing business this way include:

* Park Plaza Hotels Europe partnering with Ferens Management—a subsidiary of the Moscow-based Renova StroyGroup—to create up to 20 Park Plaza hotels in Moscow, St. Petersburg and other key cities over the next four years.
* Hilton working with London & Regional Properties Ltd. to develop 25 new properties across Russia encompassing select Hilton family brands.

One brand that has had particular success already in the Russia market is Holiday Inn, with four hotels open in Moscow and three more under development. Parent company IHG sees Russia as a key strategic market, and in the short term has seven other hotels in its Russia pipeline, which will give the company a presence in six of Russia’s 13 largest cities. In addition, the company already has launched a Russian language Web site.

Hilton, meanwhile, expects to rival IHG and other international players as executives anticipate opening more than 70 hotels across Russia in the next 10 years, including the newly opened Hilton Moscow Leningradskaya and the company’s first Doubletree and Hilton Garden Inn properties, which are set to open in other Russian cities later this year.

“For us, Russia is one of the hottest markets in Europe in terms of opportunity, which is tremendous,” says Patrick Fitzgibbon, Hilton’s senior vice president of development for Europe and Africa. “It’s one of the biggest markets in the world where we never had a presence. The challenge in Russia is the speed with which we can deliver.”

Economy, Mid-Scale Shortage

Taking a more big-picture look at all of Europe, “We think there’s a huge hole in terms of opportunity for really good, strong mid-market hotels,” Coggans says. “There’s a lack of international brands at the mid-scale.”

Everyone seems to agree that is the case, with Hilton’s Fitzgibbon sharing almost those exact same words, and Accor’s Flaxman talking about the potential for the Mercure brand in terms of conversions or franchising and the opportunity to take the SuiteHotel concept to emerging markets.

And it is only a matter of time, Coggans says, until other business brands like Courtyard by Marriott and Four Points by Sheraton make their way into the regional cities in markets like Poland and the Czech Republic.

The budget/economy sector is ripe for growth as well, Flaxman opines. “We still believe that in most of the countries in Europe, the economy segment still has a great deal of potential. He cites Germany, in particular, where there is less than 10% penetration of the segment by hotel chains, as well as the CEE markets, but notes that even France and the UK have room for growth.

“In the UK this year, we will open roughly 20 Etap hotels,” he says. “In terms of numbers of hotels and rooms, the budget and economy segment will lead the way” for Accor’s growth, he continues.

Mapping The West

The major tourism capitals in Western Europe, including London, Paris and Frankfurt, continue to be desirable places to have hotels, as they are performing well in terms of occupancy and RevPAR, but getting deals done in these mature markets is difficult, “not just because things are expensive but because there is so little land available and it is so highly regulated in terms of zoning, historic buildings and density,” Mongeau says. “There is limited ability to create new stock.”

In the UK, with mid-market domestic business remaining strong, the story is continuing brand development, especially in the extended-stay segment, where IHG is looking to take hold with Staybridge Suites and Hilton is likely to look for opportunities for its Homewood Suites brand.

Hilton also is aggressively rolling out its Doubletree and Hampton brands in both established and newer markets, trying to raise the brands’ profiles while looking to double its portfolio of hotels in the UK and Ireland over the next five years. The first UK Doubletree opened in Cambridge in April, and with the success of economy brands like Premier Travel Inn and Travelodge in the last 15 years, Hilton also sees significant opportunity for Hampton in the UK, Fitzgibbon says. He is especially excited about a deal to do 25 Hamptons by Hilton in the UK with an experienced, high-volume developer, as it will quickly give the brand scale.

In France, Paris continues to outperform, with high occupancy, RevPAR and profit growth, and while Accor dominates the market, Rezidor has seen success with its Radisson and Regent brands outside Paris and hopes to continue building on that.

Germany is seeing quite a bit of change and interest these days, with the traditional lease-driven business model starting to give way to different operating structures, including management contracts and franchising. Hilton considers the country one of its four strategic European markets, and is driving forward there with its Hilton Garden Inn brand.

“There is a strong presence of regional hotel companies [in Germany], so we see opportunity to talk with unbranded, unaffiliated hotels to convert,” Fitzgibbon says. “When markets soften, or when there is talk of that and people get nervous, owners tend to fly to brands.”

Meanwhile, on the franchising side, Golden Tulip Hospitality recently won franchise agreements for 27 hotels formerly affiliated with the Mercure brand, greatly expanding that company’s footprint in the country.

Italy is another market that has previously confounded international operators with its ownership structure and competitive domestic operators—brand affiliation thus far has been extremely low across the country. But after a few years of groundwork, the landscape is changing there, too, with Hilton teaming with local partners to add six new properties by 2009 and Sol Meliá announcing plans to open five new hotels in the country by 2010.

Interest in Italy is high not only because of its domestic market and inbound tourism market, but also because of its potential as a gateway to Montenegro, Turkey and the Middle East.

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December 3, 2007 - He wants to rule Brittania - and more

By Eric Reguly, The Globe and Mail

LONDON -- One object stands out in Lance Uggla's ultra-slick, glass-sided office on the Thames, across from the Tower of London. It is an old-fashioned easel that could have come from a kindergarten class. On it is a big piece of paper covered with a mess of black lines and scribbles. A figure in the top right corner stands out: 10.

What does it represent? "Ten-billion dollars," says the Canadian CEO of Markit Group. "It's our target valuation, where we think we can be. I'd be disappointed if we were less than that in five years time."

The figure seems fantastic until you consider that Markit is probably London's fastest-growing financial services firm. Its product - credit pricing in a world suddenly obsessed with the values of subprime loans and derivatives - is in exceedingly high demand.

"This is another Bloomberg or Thomson Financial in the making," says David Mongeau, a former CIBC World Markets executive who is now chairman of London M&A boutique Avington Financial.

When launched six years ago with $17-million (U.S.) in startup capital from TD Securities, Markit had fewer than 10 employees, all parked in a Hertfordshire barn just north of London. Today it has almost 500 employees in London and nine other cities, including Toronto. Markit's gross profit in 2006 was $40-million and has doubled every year. Based on recent financial performance, the firm is worth somewhere between $2.1-billion and $3-billion, said an executive who has seen the private valuations.

Markit's worth is something of an open secret in London because about 70 per cent of the firm is owned by 16 of the world's biggest investment banks.

These banks include Goldman Sachs, Merrill Lynch and JPMorgan. The banks are also Markit's customers, keep a close eye on the company's performance and help make a sort of grey market in the company's equity. As a result, Markit's employees, all of whom get shares in the company after one year of employment, have a pretty good idea how much they're worth. Mr. Uggla says about 50 of them are dollar millionaires on paper.

And Mr. Uggla? He owns about 8 per cent. Assuming a $3-billion valuation, his Markit holding is worth $240-million and could double or triple if the heady growth rates continue. There was a time when Mr. Uggla, 45, a former CIBC World Markets and TD Securities executive from Toronto via Vancouver, dreamed of becoming CEO of a Canadian bank. Not any more.

Mr. Uggla is genial, direct and polite. He is also a motor-mouth. You do not so much hold a conversation with him as listen to him. Don Wright, the former CEO of TD Securities, now the owner of Toronto's Winnington Capital, was Mr. Uggla's boss and mentor until Markit's creation in 2001. He says Mr. Uggla is the best natural salesman he has met, a go-getter and non-stop talker with a million ideas. "You never had to kick Lance in the butt," Mr. Wright says. "He just goes by himself. He's an unusual guy - you either love him or hate him."

Mr. Wright loved him. Mr. Uggla, a graduate of Simon Fraser University and the London School of Economics, came to TD Securities in late 1995 from CIBC World Markets, where he had been global head of fixed income, foreign exchange and debt origination. In London he ran TD's fast-growing global credit trading operations and began to build a database on credit pricing (TD was one of the first players in the credit derivatives market). At the time, accurate credit prices, unlike the prices for shares, foreign exchange and government bonds, were hard to get. Using data collected from counterparties, TD built up a wealth of information on the prices of credit and credit derivatives such as credit-default swaps (known as CDSs), corporate bonds, syndicated loans, convertible bonds and the like.

The data was then "cleaned," that is, unreliable information was discarded. This typically happened when fewer than three quotes on a security or derivative were available. As the database expanded and gained a reputation in the credit universe as a reliable source of transparent pricing, Mr. Uggla seized upon an idea. Why not build an independent business around the data, create a company called markit.com and float it on the stock market? "It was a great vision to make quick money," Mr. Uggla says.

The dot-com implosion killed that idea. So Mr. Uggla launched Plan B - spinning off TD's database and the technology that supported it into a private company. Mr. Wright supported the plan. "The banks needed this kind of service," he says.

TD agreed to come in as 50-50 partner but only if Mr. Uggla recruited other banks as investors. As owners, the banks would have the incentive to supply the credit-pricing information that Markit needed for its databases. At the same time, the banks would, as owners, have no incentive to create a competitor to Markit.

Mr. Uggla went to a dozen of the world's top investment banks. Each was offered an option on 5 per cent of Markit, based on the company's nominal valuation of $50-million, exercisable at the end 2003. All the banks exercised their options and, collectively, became Markit's majority owner. Mr. Uggla and the employees held the rest, about 30 per cent. Since then, Markit's growth has been phenomenal. The database expanded and new products and services were added, some through acquisitions. In another clever move designed to ensure the database became the industry's "gold standard," as Mr. Wright puts it, Markit did not allow any bank to buy products unless it provided free credit-pricing data in return.

Today, Markit collects data from more than 80 banks and supplies a broad range of products and services including CDS pricing, loan pricing, dividend forecasting, portfolio valuations, credit indexes and derivatives-trade processing.

"Markit is a big company now," Mr. Uggla says. "To me, over the next two or three years, I would expect Markit to be a $3- to $5-billion company and we're about halfway there."


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October 02, 2007 - Avington Advises British Columbia Investment Management Corporation in its Acquisition of Delta Hotels

British Columbia Investment Management Corporation (“bcIMC”) announced today that it has acquired Delta Hotels Limited (“Delta”) from Fairmont Hotels & Resorts Inc.

“We are very excited about this transaction as it creates a strong foundation from which to grow our brand and create opportunities for our employees. bcIMC is committed to building on Delta’s success with its long-term investment strategy and involvement in the real estate sector. We look forward to working with them to fully realize our vision,” said Hank Stackhouse, Delta’s President. “We will continue to welcome our loyal guests with the same warm and friendly service that has been the cornerstone of the Delta brand.”

“As Canada’s leading first class hotel brand, Delta is an ideal fit with bcIMC’s investment strategy to expand our diversified real estate portfolio to include hospitality. Delta’s brand recognition, experienced management and dedicated employees will be a strong complement to our diversified portfolio of assets and contribute to our ability to help finance the retirement benefits of more than 400,000 residents of British Columbia,” said Doug Pearce, bcIMC’s CEO & CIO. “We are delighted to be working with Delta and its management team to build on the company’s current success and to further expand its collection of properties.”

Avington and Bentall Capital LP acted as financial advisors to bcIMC. Blakes, Cassels & Graydon LLP and Lawson Lundell LLP provided legal advice to bcIMC. McCarthy Tétrault LLP provided legal advice to Fairmont Hotels & Resorts Inc.

About Delta Hotels
With a diversified portfolio of more than 40 city centre and airport hotels and resorts, Delta Hotels is the leading first-class hotel management company in Canada. Widely regarded as Canada’s brand of choice by guests and owners, Delta Hotels has also distinguished itself as an exemplary employer. Delta Hotels is the only hotel company to be recognized by the prestigious National Quality Institute with three Canada Awards for Excellence, including their highest honour, the Order of Excellence (2007). It has also been voted one of “The 50 Best Employers in Canada” by The Globe and Mail’s respected magazine, Report on Business (2001-2003, 2005-2007). For more information, visit www.deltahotels.com.

About bcIMC
British Columbia Investment Management Corporation (“bcIMC”) is an investment management corporation based in Victoria, B.C. With over $83 billion in assets under administration with global exposure, and supported by industry-leading investment expertise, bcIMC offers fund management services for all major asset classes, including currency and infrastructure investment. bcIMC’s clients include public sector pension plans, provincial government, public trusts, and insurance funds. For more information, visit www.bcimc.com.


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August 07, 2007 - Pension funds pumped up

Bulked up by an injection of capital and buoyed by a new self-confidence, canadian pension funds are flexing their muscles abroad

By Karen Mazurkewich, Financial Post

It looked like a pension fund, but it didn't talk, walk or act like a pension fund. That's how Jeremy Pemberton of the global investment firm Babcock and Brown sums up Oxford Properties Group, the high-profile real estate subsidiary of OMERS, the subsidiary of Ontario Municipal Employees Retirement Board pension fund.

When Mr. Pemberton first sought out Oxford, he envisioned a passive investor. But over months of negotiations, it became clear that Christopher Voutsinas, the new executive vice-president at Oxford, wasn't interested in taking a back seat on global deals. Instead, he found a partner that had "knowledgeable capital" and was quick on its feet.

"Without trying to sound derogatory [to pension funds], they acted like investment banking guys," says Mr. Pemberton, Babcock and Brown's Greenwich, Conn.-based managing director.

This week, the two companies are hoping to finalize a deal that will give Oxford a two-thirds stake in one of Babcock's German real estate portfolios containing 12,000 residential properties. Babcock is also hoping to finalize a second deal that would give the pension fund an equal share in one of its U.S. real estate platforms worth US$700-million.

In both cases, Babcock gave Oxford "meaningful influence" in the deals -- a concession the company rarely offers, says Mr. Pemberton. In return, Mr. Voutsinas, who has a stack of credentials, including former global head of asset management at Deutsche Bank, is prepared to enter "the war room" when the two firms bid on future deals, as well as help oversee project development.

"The more dialogue we have with [companies] the more the message gets out that we are different," he says.

Canadian pension funds are sowing their oats outside the country, and the world is taking notice. Bulked up with fresh injections of capital and buoyed by a new self-confidence, the big players are increasingly flexing their muscle abroad. Not only are they ramping up co-investments, they are taking direct investment roles in private equity, real estate and infrastructure sectors.

The Canadian Pension Plan Investment Board (CPPIB) now invests 45% of its assets outside Canada, up from 36% in 2005. Ontario Teachers' Pension Fund increased the percentage of non-Canadian assets in its equities portfolio from 56% in 2005 to 66% in 2006. OMERS has increased its foreign assets from 29% in 2000 to 39% in 2006.

With almost $500-billion in combined assets, the five top Canadian pension funds are getting a bigger piece of the global play book.

When they started shifting billions into overseas deals a number of years ago, the establishment viewed them as "out of their depth, too far from home," says Brian McKay, managing director, head of European corporate finance at the investment bank Houlihan Lokey. But like many private equity investors, they've seen some spectacular returns.

"Once seen as coming from behind, they are now very much part of the fabric and very serious players," he says.

The global shift started in the late 1990s when Ontario Teachers' Pension Plan, Caisse de depot et placement du Quebec, followed by OMERS and CPPIB started building up their in-house teams -- first to explore public equities and then private. Most recently, British Columbia Investment Management Group (BCIMG) has stepped into the ring.

The volatility of the public markets combined with buyout opportunities abroad, forced the funds to look at the alternative markets, says Michael Nobrega, president and chief executive of OMERS, who once headed the fund's infrastructure arm. He says the fund will continue to boost its exposure in these markets.

When Mark Weisdorf joined CPPIB in 2000 as head of private investments, the plan only had $7-billion in total to invest in the private markets. But for Mr. Weisdorf, who now heads the Infrastructure Investments group at JP Morgan Asset Management in New York, those were heady days.

One of the deals that put CPPIB on the map was the $1.502-billion buyout of a private equity portfolio from Deutsche Bank in 2003, which it did in conjunction with eight other investors including Ontario Teachers.

"We were doing creative, innovative stuff then," says Mr. Weisdorf.

But the real frenzy in overseas spending started after the federal government lifted restrictions on foreign investment in tax-sheltered accounts in 2005. Suddenly, pension funds were free to invest as much as they wanted, anywhere in the world. And they were less content to take a passive investment role.

For players like Steve Murray, managing director of CCMP Capital Advisors, the CPPIB is one of a handful of investors who want to participate early in funds, along with the likes of Goldman Sachs and JP Morgan. By being quick and decisive, they are able to "exploit opportunities that might go to another fund," he says.

Not surprisingly, Canadian pension funds are now viewed as virtual private equity groups, says David Mongeau, of U.K.-based Avington International, a global mergers and acquisitions advisory firm that stickhandled a number of recent deals including the Legacy REIT sale with Caisse de depot, and the BCIMG purchase of the Canadian Hotel Income Properties Real Estate Investment Trust.

The arrival of the Canadian pension funds "was an opportunity for these private equity guys to get smart capital," he says.

In the past, private equity players co-partnered on big deals, but that meant sharing trade secrets, which they were reluctant to do, he says. In addition, "the funds understand complicated deals."

For some on the outside, the Canadians' new global private investment push was a surprise. "They had finally found the airport," jokes Colin Hood, chief operating officer of Scottish and Southern Energy.

In 2004, Mr. Hood cut a "holy trinity" deal with Borealis Infrastructure Management Inc., a subsidiary of OMERS, and Ontario Teachers' for the purchase of Scotland and the South of England gas distribution networks. (OMERS and Teachers' each took at 25% stake for $665-million.)

The deal has had its ups and downs, particularly over the issue of IT spending, but no one stormed out. "We always stayed in the room and slugged it out," he says.

The deal, according to Mr. Hood was a watershed for OMERS: "It gave them confidence to do more."

Since that deal, OMERS continues to flex its muscle abroad. Although it just lost out on a bid for a toll road in France, and an office tower in Sao Paulo, the pension fund is eying infrastructure opportunities in Italy, Germany and Eastern Europe, and is discussing opportunities for future deals with UBS Global Asset Management in Japan.

When it comes to infrastructure deals, "we know all the major deals around Western Europe, Mexico and Brazil through investment banking communities or lead accounting firms or law offices," says Mr. Nobrega. "We are far ahead of the U.S. and European pension funds."

OMERS' new push is in real estate. "We've invested $2-billion of capital just in equity, not including debt from a standing start of zero," says Mr. Voutsinas, who joined Oxford at the end of 2005.

Most recently, Oxford signed a deal to invest £200-million with UBS in a "milestone" deal to codevelop its 530,000-square-foot Watermark Place office tower in London -- its largest international investment to date, says Andrew Trickett, senior vice-president, Oxford.

Two years ago, more than 98% of Oxford's assets were in Canada. The goal is to have 50% or more of its assets abroad. Oxford plans to open several international offices -- the first in London.

Still, Mr. Voutsinas admits that "the wall of [other] capital that exists makes it hard to get people's attention."

But he is bullish about the future.

"If you look at U.S. pension funds, they are very passive and work through intermediaries," he says. "We work really hard to make it clear that we are entrepreneurial and commercially minded."


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August 1, 2007 - Avington advises British Columbia Investment Management Corporation in its acquisition of CHIP REIT
 
Canadian Hotel Income Properties Real Estate Investment Trust ("CHIP REIT") announced today that its board of trustees has entered into a support agreement in favour of a cash takeover offer of $19.10 per unit by British Columbia Investment Management Corporation ("bcIMC").

The offer represents a 34 per cent premium over the closing price of CHIP REIT units on July 31, 2007, the last trading day prior to this announcement, and a premium of 22 per cent over the closing price of $15.68 on March 27, 2007, the last trading day prior to CHIP REIT's announcement that it had established a special committee of trustees to review strategic and structural alternatives for enhancing unitholder value.

bcIMC has also agreed to acquire all outstanding CHIP REIT six per cent convertible debentures for a price of $1,625.53 per $1,000 debenture. The transaction has a total value of approximately $1.2 billion, including debt.

Following a thorough review of strategic and structural alternatives and the recommendation of the special committee, the transaction is being unanimously recommended by the CHIP REIT board of trustees and is expected to close during the fourth quarter of 2007. CHIP REIT's largest unitholder, affiliates of the Belkorp Group, have entered into a lockup agreement pursuant to which they have agreed to tender to the offer their 13.3 million units, representing approximately 27 per cent of CHIP REIT's total units outstanding.

CHIP REIT unitholders will continue to receive their regular monthly distributions until the transaction is completed.

"As one of Canada's best-run hotel businesses, CHIP REIT will be a strong complement to our diversified portfolio of assets and contribute to our ability to help finance the retirement benefits of more than 400,000 residents of British Columbia," said Doug Pearce, CEO and CIO of bcIMC. "CHIP REIT will continue to pursue its existing strategy under its current management team following the successful conclusion of this transaction."

Avington and Bentall Capital LP acted as financial advisors to bcIMC with Lawson Lundell LLP and Blake, Cassels & Graydon LLP providing legal advice.

CIBC World Markets Inc. has provided CHIP REIT's board of trustees with its opinion that the consideration to be received by CHIP REIT unitholders and six per cent convertible debentureholders is fair, from a financial point of view, to unitholders and six per cent convertible debentureholders of CHIP REIT.

Koffman Kalef provided independent legal counsel to the special committee of trustees. Fraser Milner Casgrain LLP is legal counsel to CHIP REIT.

About CHIP REIT
CHIP REIT is an integrated hotel real estate investment trust focused on mid-market and upscale full-service hotels. Through its large, diversified portfolio, CHIP REIT provides investors with stable income and growth potential through acquisitions, repositioning and franchising under banners that include Delta, Radisson, Marriott and Hilton. CHIP REIT currently owns and manages 32 hotels with approximately 7,700 guestrooms. In 2006, CHIP REIT was named "Hotel Company of the Year" by Hotelier Magazine, becoming the first REIT to win a Pinnacle Award in the hospitality industry's national recognition program. CHIP REIT units and convertible debentures trade on the Toronto Stock Exchange under the symbols HOT.un, HOT.db and HOT.db.a.

About bcIMC

bcIMC is an investment management corporation based in Victoria, BC. With over $85 billion in assets under administration with global exposure, and supported by industry-leading expertise, bcIMC offers fund management services for all major asset classes, including currency and infrastructure investment. bcIMC's clients include public sector pension plans, provincial government, public trusts, and insurance funds. For more information, visit www.bcimc.com.



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July 12, 2007 - Avington Advises Consortium in its acquisition of LEGACY HOTELS REIT
 
Legacy Hotels Real Estate Investment Trust ("Legacy" or the "Trust") (TSX:LGY.UN), Cadbridge Investors LP (a limited partnership formed by Cadim, a division of the Caisse de depot et placement du Quebec, and Westmont Hospitality Group, "Cadbridge") and InnVest Real Estate Investment Trust ("InnVest") (TSX:INN.UN) today announced that they have entered into a support agreement (the "Support Agreement") pursuant to which LGY Acquisition LP (a limited partnership formed by Cadbridge and InnVest, the "Offeror") has agreed to offer $12.60 in cash per unit (the "Offer") to acquire all of Legacy's outstanding units (including units issued upon the exchange of outstanding exchangeable shares or the exercise of options prior to completion of the Offer). The all-cash transaction is valued at approximately $2.5 billion, including debt.

The purchase price under the Offer represents a 20% premium over Legacy's 30-day average trading price on the Toronto Stock Exchange (the "TSX") on February 28, 2007, the last trading day prior to Legacy announcing the formation of its Special Committee to explore strategic alternatives.

Following a thorough review of the Trust's strategic alternatives, and recommendation of the Special Committee, Legacy's Board of Trustees has unanimously approved the transaction and unanimously recommends that the Trust's unitholders tender their units to the Offer. Fairmont Hotels & Resorts Inc., Legacy's largest unitholder representing 20.4% of the outstanding voting rights, has entered into a lockup agreement with the Offeror to tender its entire ownership interest in Legacy to the Offer.

Under the terms of a post acquisition reorganization, Legacy's portfolio of assets will generally be allocated with Cadbridge owning the large Fairmont managed hotels and InnVest owning primarily Delta hotels.

"The proposed transaction reflects our commitment to deliver value to our unitholders," stated Neil J. Labatte, Legacy's President and Chief Executive Officer. "Over the ten years since our formation, we have assembled an unmatched portfolio of luxury and first-class hotels. We believe the price offered by the Offeror fairly reflects the underlying value of these assets. Cadim, Westmont and InnVest are well-respected investors with a strong track record in the lodging industry."

Fernand Perreault, Executive Vice-President, Real Estate of Caisse de depot et placement du Quebec added, "This acquisition provides us with an important ownership platform in this industry, combining talented people, well-known brands and an irreplaceable collection of hotel real estate. We look forward to working with management and the hotels."

Kenneth Gibson, President and Chief Executive Officer of InnVest, commented, "Legacy's portfolio consists of a diversified collection of well-branded hotel assets. We are thrilled to have the opportunity to purchase these quality assets and establishing InnVest as the largest hotel REIT in Canada."

The Trust may terminate the Support Agreement under certain circumstances upon payment to the Offeror of a break-up fee of $46 million.

Avington acted as financial advisor to Cadbridge and InnVest. Morgan Stanley and RBC Capital Markets acted as financial advisors to Legacy. Legacy's Board of Trustees has received an opinion from each of Morgan Stanley, RBC Capital Markets and BMO Capital Markets that the consideration under the Offer is fair from a financial point of view to the unitholders of Legacy.

About Legacy Hotels Real Estate Investment Trust

Legacy is the largest Canadian lodging real estate investment trust, focused on the ownership of luxury and first-class hotels. With a presence across Canada and in two top U.S. markets, Legacy's portfolio of 25 hotels provides geographical diversification across major urban centres. The portfolio includes landmark properties such as Fairmont Le Chateau Frontenac, The Fairmont Royal York, The Fairmont Empress and The Fairmont Olympic Hotel, Seattle. Legacy units trade on the Toronto Stock Exchange under the symbol LGY.UN.

About the Caisse de depot et placement du Quebec and Cadim

The Caisse de depot et placement du Quebec is a financial institution that manages funds primarily for public and private pension and insurance plans. As at December 31, 2006, it held CA$143.5 billion of net assets. One of the leading institutional fund managers in Canada, the Caisse invests in the main financial markets as well as in private equity and real estate. For more information: www.lacaisse.com.

Cadim, a division of the Caisse de depot et placement du Quebec and a member of the Caisse's Real Estate Group, is a global real estate investment manager. Cadim invests in a diversified range of equity and financing products through a network of affiliates and prominent partners in the United States, Europe and Asia. Cadim is an opportunistic investor whose success relies on its capacity to close large-scale transactions and to take advantage of key leverage opportunities. As at December 31, 2006, total assets under management totalled $36.3 billion.

About Westmont Hospitality Group

Westmont is one of the largest private owners of hotels in the world, owning and/or managing over 400 hotels globally with operations in North America, Europe and Asia.

About InnVest Real Estate Investment Trust

InnVest Real Estate Investment Trust holds Canada's largest hotel portfolio together with an interest in Choice Hotels Canada Inc., the largest franchisor of hotels in Canada. The hotel portfolio currently comprises 135 hotel properties with over 15,000 guest rooms, operated under internationally recognized franchise brands. InnVest's trust units and outstanding convertible debentures trade on the Toronto Stock Exchange under the symbols INN.UN, INN.DB.A and INN.DB.B, respectively.



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July 4 2007 - Europe hotel chains could be set for a visit

By Roger Blitz, Leisure Industries Correspondent, The Financial Times

Judging by the share jumps across the hospitality industry on Wednesday, markets throughout Europe were weighing up the prospect of more mega deals to match Blackstone's $26bn offer for Hilton on Tuesday night.

Everyone - from Intercontinental Hotels Group, Whitbread and Punch Taverns in the UK to Accor in France and NH Hoteles and Sol Melia in Spain - was riding the wave generated by the Hilton board's decision to accept the private equity group's $47.50-a-share cash offer.

The pace of hotel deals this year was outstripping that of 2006 even before Blackstone made its move. Last year there were $72bn of deals in the hotel sector. According to Jones Lang LaSalle Hotels, 2007 hit $56bn before the Blackstone-Hilton announcement - driven predominantly by private equity groups taking hotel real estate investment trusts private.

Even so, at a 40 per cent premium to Hilton's opening share price on Tuesday, market sceptics could be forgiven for wondering whether Blackstone's deal truly reflected the going rate for the sector. Bill Gates and Prince Al Waleed Bin Talal's $3.7bn bid in November for Four Seasons valued the hotelier at a 28 per cent premium.

The Hilton deal has elements peculiar to itself, says David Mongeau of Avington, investment banking specialists in the hospitality sector. "The North American market is different than in the UK and Europe in that Reits [real estate investment trusts] have existed for quite a while and private equity has long been interested in the hotel asset class there," he said.

While most hotel companies have separated the bricks and mortar from management, selling down the assets to manage or franchise the hotels, Hilton was a bit different, said Mr Mongeau. Hilton still has some meaningful real estate in very important markets, such as the Waldorf-Astoria and Hilton in New York City, both of which occupy full blocks of prime real estate. The former reportedly has a market value of about $1bn. Those strong assets helped underpin a very aggressive financing structure. None of that was realisable until the historic merger, completed last year, of Hilton Hotels Corporation with Hilton International, its sister UK arm, after having gone their separate ways for 42 years.

Blackstone made clear it regarded the Hilton deal as a double play, the purchase offering both asset and operational benefits. Arthur de Haast of JLL Hotels said: "One of the things this deal throws up is a private equity company buying into not just the real estate but the operational entity and a brand. They are a competitor as well as an owner."

That offers the intriguing prospect of Blackstone's Hilton managing hotels owned by other private equity companies. Morgan Stanley Real Estate, for example, this year bought Hilton's Scandic brand in Europe, a brand Hilton will continue to manage.

Blackstone knows better than most how to extract value from hotel deals. In 2004, it bought the Extended Stay Hotels brand for $3bn. This year, it sold the chain to Lightstone for $8bn.

Most hotel observers expect Hilton to become an aggressive real estate buyer now it is going private and to slot acquisitions into its existing brands, such as Hilton, Conrad, Doubletree, Hilton Garden Inn and Hampton Inn.

"Having bought into the operating entity, they will want to see these brands grow as quickly as possible," Mr de Haast said, suggesting Blackstone would look to replicate Prince Al-Waleed's heavy backing of his Kingdom Hotel brands.

IHG, the takeover talk in the hospitality sector for much of the year, is regarded as the next target. That puts the Barclay brothers, who have built up a 10 per cent stake in IHG, in a pleasing position. Judging by the value Hilton has achieved, the brothers' assessment of IHG as a cheap stock appears well-founded.

Copyright The Financial Times Limited 2007


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April 24, 2007 - Our LBO man in Europe

By Eric Reguly, The Globe and Mail

There is life after CIBC. Two years ago, David Mongeau, then the managing director of global M&A for CIBC World Markets, quit the bank. He had been living in London and decided the new CIBC, under Gerry McGaughey, was more interested in shoring up the Canadian retail bank than conquering Europe's hot deal market.

But Mongeau and another CIBC alumnus, Piers Talalla, weren't ready to call it quits. They formed a boutique M&A shop called Avington Financial and now find themselves at the centre of battle for Alliance Boots, Europe's biggest private-equity deal. Alliance Boots, with headquarters in London, is Europe's top pharmacy and beauty products chain. Its roots go back to the mid 1850s, when John Boot set up a herbal remedies business in Nottingham. The company became Europe's biggest pharmacy and beauty products chain last year, when it merged with Alliance Unichem, controlled by Italian entrepreneur Stefano Pessina.

Boots (as it's still called in Britain) faces another radical transformation. It has attracted competing bids from Kohlberg Kravis Roberts, the same firm that's going after BCE, and group led by Terra Firma, one of Europe's biggest private equity players. Avington is advising Terra Firma and it promises to be a wild ride. The battle has turned nasty, with Terra Firma accusing Pessina, who is Boots's executive deputy chairman and KKR's ally, of not conducting a fair auction. This morning, KKR and Pessina announced they had raised their bid to pounds 11.1-billion and together owned 25 per cent of the shares after a market "dawn raid" (I will write in more detail about the takeover in a full column later in the week).

It's now Terra Firma's move. Whether Terra Firma wins or loses, Avington advisory role in Europe's battle of the moment can only be good publicity for the Canadian lads. In two years, they have advised on some of the biggest deals in the hospitality and leisure industries, including Fairmont's defence against Carl Icahn and the Canadian hotel company's subsequent merger with Raffles. Putting Canadian pension fund money into European deals promises to be a growth area for Avington. As luck would have it, Avington's London offices, in Mayfair, are in the same building as the new European office of the Ontario Teachers Pension Plan. We're sure there'll be some interesting conversations in the pub around the corner.


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January 18, 2007 - AVINGTON RANKS #2 ON BLOOMBERG M&A LEAGUE TABLES

- Avington ranked number two in the Bloomberg Advisory Rankings for Global Hospitality Mergers & Acquisitions for 2006. Total transaction volume was over US $6.5 billion, representing a leading global market share of 22 percent.

In its first full year of operations, Avington advised on some of the largest and most significant transactions in the global hospitality industry, including acting as lead hostile defense advisor to Fairmont Hotels & Resorts in its defense of the Carl Icahn hostile takeover bid, the US $3.9 billion white knight take-private transaction by Kingdom Hotels International and Colony Capital and the concurrent US $1.6 billion Raffles Hotels & Resorts acquisition.

Avington also acted as sole financial advisor to OMERS in its US $1.5 billion acquisition of the Canadian luxury hotel portfolio from Fairmont Raffles Holdings International and as sole advisor to OMERS on its acquisition of a minority interest in Fairmont Raffles Holdings International.

M & A League tables
Source: Bloomberg / 2006 Hospitality M&A final League Table results

Avington is a focused, independent advisory investment bank with particular expertise in transactions within the global hospitality, leisure and consumer-related industries. Avington was formed by David C. Mongeau and Piers Talalla in late 2005 to provide high level conflict free advice to select clients in these industries of focus.

We thank our clients and industry colleagues for having confidence in Avington to enable us to assist in the implementation of their strategic objectives.


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October 4, 2006 - Avington Advises Oxford Properties in the Acquisition of 7 Canadian hotels from Fairmont Raffles

By CBC News

Oxford Properties, the real estate investment subsidiary of the Ontario Municipal Employees Retirement System (OMERS), has purchased seven Canadian Fairmont hotels - including the Banff Springs and Chateau Lake Louise - from Fairmont Raffles.

The list of high-profile properties include three in Alberta, two in British Columbia and two in Quebec:

  • The Fairmont Banff Springs in Banff, Alta.
  • The Fairmont Chateau Lake Louise in Lake Louise, Alta.
  • The Fairmont Chateau Whistler in Whistler, B.C.
  • The Fairmont Jasper Park Lodge in Jasper, Alta.
  • The Fairmont Vancouver Airport in Richmond, B.C.
  • Fairmont Le Château Montebello in Montebello, Que.
  • The Fairmont Kenauk at Le Château Montebello in Montebello, Que.

The purchase price for the recently concluded deal, while not confirmed by Oxford, was reported by the Globe and Mail to be $1.5 billion.

Avington International acted as financial advisor to Oxford in the acquisition.

In January, Fairmont Hotels & Resorts agreed to be bought by Colony Capital and a Canadian firm owned by Kingdom Hotels International. The friendly merger was Fairmont's way of fending off a takeover by U.S. financier Carl Icahn.

Kingdom is owned by Saudi Arabian Prince Alwaleed bin Talal Abdulaziz Alsaud, one of the richest men in the world, while Colony Capital owns the Asian-based Raffles hotel chain.

Reports emerged in June that the Banff Springs hotel was on a list of properties that Fairmont Raffles had put up for sale.


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January 30, 2006 - Avington Advises Fairmont in its Acquisition by Kingdom Hotels and Colony Capital

Fairmont and Raffles to Combine, Creating a US$5.5 Billion Global Luxury Hotel Leader

TORONTO,

Fairmont Hotels & Resorts Inc. ("Fairmont" or the "Company")(TSX/NYSE: FHR) today announced that it has entered into an Acquisition Agreement whereby a Canadian company owned by Kingdom Hotels International ("Kingdom") and Colony Capital ("Colony") will acquire all of Fairmont's outstanding common shares at a price of US$45.00 per share in cash. The total value of this transaction, including debt and the combination with Raffles, is expected to be approximately US$5.5 billion (or US$3.9 billion, without giving effect to the Raffles combination).

This all-cash transaction for 100% of the Company's shares represents a 28% premium over Fairmont's closing share price on November 4, 2005, the last trading day on the NYSE prior to the public expressions of interest in the Company, and exceeds the highest trading price of the shares. The transaction has been unanimously approved by Fairmont's Board of Directors following receipt of the recommendation of a Special Committee of the Board. Fairmont's Board has agreed to recommend to its shareholders that they vote in favor of the transaction. The Board confirmed its previous recommendation of December 21, 2005 to reject the Icahn bid and not to tender to the Icahn bid.

Fairmont has been advised by Kingdom and Colony of their intention to combine the Fairmont and Raffles portfolios following the completion of the transaction, transforming the companies into a luxury global hotel leader with 120 hotels in 24 countries. Fairmont will remain an independent hotel management and ownership company headquartered in Canada and Raffles, based in Singapore, will also retain its independent brand identity. Raffles owns and manages a portfolio of 33 properties located primarily across Asia and Europe, including its flagship property built in 1887, the Raffles Hotel, Singapore.

"This transaction is the ideal means of delivering significant, immediate value to the Company's current shareholders while preserving this Canadian-based company and establishing a solid platform from which to grow," stated Peter C. Godsoe, Chairman of Fairmont's Board of Directors. "As previously announced, the Fairmont Board created a Special Committee to review options for maximizing value for our shareholders. This review was thorough and dynamic, and it attracted significant interest from a number of parties. Following the presentation of the results of this review by the Special Committee, and the Special Committee's recommendation, the Fairmont Board has unanimously recommended the transaction with Kingdom and Colony."

"We are very excited about this transaction as it delivers value to our shareholders and creates an expanded foundation from which to build on our legacy, grow our brand and create significant opportunities for our employees. With an expanding international portfolio of exceptional resorts and gateway city properties, our guests will be exposed to new, exciting destinations with different cultures," said William R. Fatt, Fairmont's Chief Executive Officer. "We look forward to working with our partners who are committed to building on the success of our Company."

HRH Prince Alwaleed bin Talal bin Abdulaziz Alsaud of Kingdom said, "As one of Fairmont's current shareholders and strategic partners, Kingdom has long recognized the Company's existing value and potential. Fairmont's success is clearly attributable to the dedication and professionalism of its management and employees. We look forward to partnering with Colony and working with both Fairmont and Raffles' management to take the combined companies to a new level of achievement." Kingdom and its affiliates own 3,875,000 common shares of Fairmont.

"Colony's mission is to make major investments with world class partners in irreplaceable assets managed by proven management teams. Our partnership with HRH Prince Alwaleed and our investments in Fairmont and Raffles fulfill our mission," commented Thomas J. Barrack, Jr., Chairman and Chief Executive Officer of Colony. "Fairmont and Raffles are an excellent strategic fit with rich histories, global brand recognition and complementary destinations. Joining the two luxury companies creates an ideal platform for continued international expansion."

The transaction is to be carried out by way of a statutory plan of arrangement and, accordingly, will be subject to the approval of 66?% of the votes cast by Fairmont's shareholders at a meeting of shareholders, currently anticipated to take place in April, as well as court approval. A proxy circular will be prepared and mailed to shareholders in March providing shareholders with important information about the transaction. Once mailed, the proxy circular will be available at the Canadian SEDAR website at www.sedar.com and at the SEC's website at www.sec.gov. All shareholders are urged to read the proxy circular once it is available.

The closing is subject to certain other customary conditions, including regulatory approvals. The closing of the transaction is not subject to any financing condition. The proposed transaction is expected to close in the second quarter of 2006, shortly after receipt of shareholder and court approvals.

Avington International, UBS Investment Bank and Scotia Capital Inc. acted as financial advisors to Fairmont. J.P. Morgan Securities Inc. acted as financial advisor to Kingdom and Colony.

This news release contains certain forward-looking statements relating, but not limited to, Fairmont's operations, anticipated financial performance, business prospects and strategies. Forward-looking information typically contains statements with words such as "anticipate", "believe", "expect", "plan", "estimate", "guidance", "aim" or similar words suggesting future outcomes. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements. Such factors include, but are not limited to, economic, competitive and lodging industry conditions. These risks are further described in Fairmont's filings with Canadian securities regulatory authorities (www.sedar.com) and with the U.S. Securities and Exchange Commission website (www.sec.gov). All forward-looking statements in this news release are qualified by these cautionary statements. These statements are made as of the date of this news release and except as required by applicable law, Fairmont disclaims any responsibility to update any such forward-looking statements, whether as a result of new information, future events or otherwise.

About Fairmont Hotels & Resorts Inc.

FHR is a leading owner/operator of luxury hotels and resorts. FHR's managed portfolio consists of 87 luxury and first-class properties with approximately 34,000 guestrooms in the United States, Canada, Mexico, Bermuda, Barbados, United Kingdom, Monaco, Kenya and the United Arab Emirates as well as two vacation ownership properties managed by Fairmont Heritage Place. FHR owns Fairmont Hotels Inc., North America's largest luxury hotel management company, as measured by rooms under management, with 49 distinctive city center and resort hotels including The Fairmont San Francisco, The Fairmont Banff Springs and The Fairmont Scottsdale Princess. FHR also owns Delta Hotels, Canada's largest first-class hotel management company, which manages and franchises 38 city center and resort properties in Canada. In addition to hotel management, FHR holds real estate interests in 21 properties and an approximate 24% investment interest in Legacy Hotels Real Estate Investment Trust, which owns 24 properties. FHR owns FHP Management Company LLC, a private residence club management company that operates Fairmont Heritage Place, a vacation ownership business.

About Kingdom Hotels International

Kingdom is owned by a trust for the benefit of HRH Prince Alwaleed bin Talal bin Addulaziz Alsaud and his family. HRH Prince Alwaleed and related trusts and other entities have made substantial investments in multiple sectors including banking, hotels, media, telecommunications, technology, construction and real estate, entertainment, and upscale fashion, among numerous others. Significant hotel-related investments include interests in Fairmont Hotels & Resorts, Four Seasons Hotels and Resorts, the George V Hotel and Mövenpick Hotels & Resorts, covering more than 260 hotels throughout the U.S., the Middle East and Africa. Significant investments in other sectors include interests in Citigroup, News Corp., Time Warner, Motorola, Apple Computers, Ballast Nedam, Canary Wharf, Disneyland Paris, Saks Inc. and Kingdom Center.

About Colony Capital

Founded in 1991 by Chairman and Chief Executive Officer Thomas J. Barrack Jr., Colony is a private, international investment firm focusing primarily on real estate-related assets and operating companies. At the completion of this transaction, Colony will have invested more than $20 billion in over 8,000 assets through various corporate, portfolio and complex property transactions. The firm owns Raffles Hotels & Resorts, the legendary Costa Smeralda resort in Sardinia, Italy and Hotel Guanahani in St. Barts. Colony's other investments in exclusive leisure lifestyle and resort properties have included the Amanresorts hotel chain, London's Savoy Group, the Orchid at Mauna Lani on Hawaii's Big Island, The Stanhope Hotel in New York City, the "W" in Honolulu, the Mayfair in Miami, Resorts International in Atlantic City, Atlantic City Hilton, Las Vegas Hilton, Accor Casinos in Europe, and the Sunrise Colony Country Club communities. Colony has a staff of more than 110 and is headquartered in Los Angeles, with offices in Beirut, Boston, Hawaii, Hong Kong, London, Madrid, New York, Paris, Rome, Seoul, Shanghai, Singapore, Taipei, and Tokyo.

About Raffles Hotels & Resorts

Raffles is a collection of 33 luxury hotels, including 23 Swissôtels, located in major cities around the globe that distinguishes itself through the highest standards of products and services. Each hotel is a landmark in its respective city and most are positioned at the top of their local markets. The collection of legendary hotels includes Raffles Hotel and Raffles The Plaza in Singapore, Raffles Grand Hotel d'Angkor, Siem Reap, Cambodia, Raffles Hotel Le Royal, Phnom Penh, Cambodia, Raffles L'Ermitage Beverly Hills in the US, Raffles Resort Canouan Island, The Grenadines, Raffles Hotel Vier Jahreszeiten, Hamburg, Germany and Raffles Le Montreux Palace, Montreux, Switzerland. Raffles will open the new Raffles properties in Beijing in mid-2006 and and Dubai in 2007. (www.raffles.com)


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