Tsogo beefs up Hospitality

LEISURE AND GAMING: GROUP RAMPS UP TRUST IN R23BN DEAL

Offloading its hotels and casinos into a separately listed entity.

Tsogo Sun’s JSE-listed real estate investment trust (Reit), just gained momentum with a multi-billion rand deal, announcing that Hospitality has acquired its seven casino-and-hotel precincts in a shares and subscription agreement worth R23 billion.

The price of the transaction is four times larger than the market capitalisation of Hospitality (R5.7 billion at the time of writing).

The deal is part of management’s three-year-long stated objective to spin off their hotel properties into a separately listed entity, and for Hospitality, it’s a chance to build scale in the JSE’s only hotel-focused Reit.

On completion of the deal, Tsogo will increase its shareholding in Hospitality from 59.2% to approximately 87%. For Tsogo to clinch the 87% stake, Hospitality said in May that approximately 1.2 billion shares would be issued to Tsogo at a price of R12.50/share. This is a premium given that Hospitality shares barely managed to hang on to levels of above R12/ share over the past three months.

Tsogo first acquired a 50.6% controlling stake in Hospitality in exchange for selling it 10 hotels worth R1.8 billion. Tsogo shifted more hotels into Hospitality in 2017, in a deal worth about R3.6 billion.

In the first round, Tsogo injected mainly secondary hotels in secondary locations. However, with the latest deal, it has beefed up Hospitality with prime hotels and casinos. The seven hotel-and-casino precincts include Gauteng’s Montecasino, Gold Reef City Casino and Silverstar Casino; KwaZulu-Natal’s Suncoast Casino and Blackrock Casino; and Mpumalanga’s Emnotweni Casino and The Ridge Casino.

Earnings potential

Hospitality says the precincts will be subject to 20-year triple net leases – meaning the occupiers of the hotels and casinos, rather than itself, will be responsible for costs including rates and taxes, insurance and maintenance. The 20-year triple net lease will provide it with a stable and predictable income. The hotels and casinos are expected to generate profit after tax of R291.9 million in the three months to March 2019, and considerably more – R1.3 billion – in the three months to March 2020.

deal means Hospitality’s property portfolio of hotels will grow to approximately R36 billion, compared with R5.1 billion in 2016.

The purchase of the seven precincts will add 1 335 hotel rooms to Hospitality’s existing 9 003 rooms, including the Radisson Blu Waterfront and the Westin in Cape Town; Crowne Plaza – The Rosebank, the Radisson Blu Gautrain Hotel and the Holiday Inn Sandton in Johannesburg; Mount Grace Country House & Spa near Magaliesburg; and Champagne Sports Resort in the Drakensberg.

Simon Brown, founder of JustOneLap, says it made sense for Tsogo to transfer its properties to Hospitality as he doesn’t see merit in the group being a hotel operator and property owner. “When you buy Tsogo shares, you will be buying into the gambling part of the business rather than the buildings part as well,” he told Moneyweb. “The buildings are the complex part of casinos and hotels. Tsogo is cleaning up its structure.”

The deal gives Hospitality prime hotels and casinos