A piece of Piccadilly

One of the most striking properties near London's Piccadilly Circus is Le Meridien Hotel. Constructed in 1908, and designed by famed British architect Richard Norman Shaw, it was built to draw attention to the whole redesign of nearby Regent Street.

Back then, Londoners wanted large department stores rather than smaller stores. A hundred years later and Regent Street is once again being redesigned by its freeholder, The Crown Estate.

However, change is also coming to Le Meridien.

Last month, after three years of ownership, joint owners Lehman Brothers and Starwood Capital put the hotel up for sale with a guide price of around £90 million (€105.7 million, $136.4 million).

Le Meridien used to be known as The Piccadilly Hotel and has passed through several hands in its lifetime. The first owner, Harry Deeley, paid what seems like a tiny sum for the property – £500,000. The second owner was a Welsh catering company called RJ Jones. In the 1950s, the famed property investor Sir Maxwell Joseph was an owner, paying £1.75 million for the hotel and the Grand Metropolitan chain.

But it wasn't until the 1980s that it became known as Le Meridien. In 1986, Air France acquired the property for its international Meridien hotel brand. Air France used to cross-sell rooms at its hotels to passengers. But the flag carrier's connection to the chain ended a few years later when corporate strife led to a sale.

The property then swapped hands between Rocco Forte and Granada's catering group Compass, which eventually jettisoned the chain in 2001.

This is when the problems began which eventually led to Lehman's and Starwood owning the chain. Nomura, the Japanese bank, acquired Le Meridien for £1.9 billion in a deal led by Guy Hands, who later managed the chain under his spin-out private equity buyout shop, Terra Firma.

To finance the acquisition, Nomura agreed to sell and manage 12 UK properties, not including Le Meridien Piccadilly, back to the Royal Bank of Scotland (RBS) for £1.25 billon. That deal – clever at the time – unfortunately brought the entire group down.

Following 11 September, 2001, Le Meridien could not afford to meet the rents for the 12 properties. According to reports at the time, the deal was structured in such a way it prevented revenue from other hotels outside the 12 properties from helping subsidise the rent.

This led to nearly four years of wrangling between interested parties, including Lehman Brothers which needed to protect a reported £160 million of mezzanine finance provided to the original deal.

Following rescue plans from Terra Firma and others, plus bids and counter bids, Le Meridien eventually fell under the control of Lehman Brothers in 2005. The bank struck a joint venture deal with Starwood Capital whereby Starwood and Lehman would own the properties, while Starwood Hotels would manage the hotels.

The recent demise of Lehman Brothers has nothing to do with the decision to sell, according to real estate agent Eric Kudlak, managing director of Molinaro Koger, which is selling the hotel, as quoted in the UK newspaper, The Times. The JV is not involved in Lehman's insolvency proceedings.

And, according to those in the know, interest is already coming from US opportunity funds, private equity firms, UK companies and some Middle Eastern capital. A deal is expected to be completed in the first quarter of 2009.

And what would the new buyers get? Well, the hotel does offer some value-add opportunities with the chance to expand the 267 keys and convert the high-ceilinged basement area that once hosted dances and Masonic meetings.

The hotel was also a regular haunt of King George V (it even had its own well so that guests could avoid drinking London's water supply). Now that's an offer few private equity real estate deal guys could refuse.