The Five Food Groups – January 2008

HOSPITALITY
Colony and Eurazeo snap up shares in Europe’s largest hotels owner
Private equity firms Colony Capital and Eurazeo have been forced on the defensive after unveiling plans to increase their stakes in Europe’s largest hotel owner, Accor, to 30 percent. Los Angeles-based Colony and Paris-based Eurazeo both insisted they had no intentions of taking over the hotel group, after saying they would increase their stake to 20 percent and 10 percent respectively. Colony increased its stake from nine percent while Eurazeo said it would raise its stake to 8.5 percent by the middle of last month, and to 10 percent “in the months to come, by the end of the year the latest.” Accor plans to expand its hotel platform from almost 500,000 rooms to up to 700,000 by 2010, with 22 percent focused in Asia, 41 percent in Europe and 20 percent in North and Latin America. It currently operates the luxury hotel chain Sofitel, the upscale Novotel and Pullman brands and the economy Ibis hotel group. However, as Colony and Eurazeo unveiled their plans, Accor urged the duo to guarantee their investment would not lead to a “de facto takeover.” At the time both private equity firms said they had no intention of taking control of the company, but Eurazeo’s chief executive was forced to repeat the sentiment again at his firm’s annual shareholders meeting two weeks later saying the pair’s strategy towards Accor was friendly and that it backed the strategy of Accor’s management. “Do we want control of Accor? No and no,” he said.

INDUSTRIAL
Arcapita’s global push
Arcapita, the Bahrain-based investment firm, has acquired Pinnacle Real Estate, a developer and operator of logistics warehouses in Central and Eastern Europe. Financial terms were not disclosed. Merrill Lynch’s Global Principal Investment group previously had a majority stake in the industrial developer. In addition to the 230,000-square-meter portfolio of warehouses, the deal also included close to 1.5 million square meters of land for future development. In April, Arcapita partnered with ProLogis on a $1 billion (€646 million) joint venture, Pro-Logis Middle East, to target logistics warehouse space in the Gulf Cooperation Council (GCC) region. The Pinnacle deal takes Arcapita’s European investment in logistics to more than €1.4 billion, with approximately two million square meters of developed and developable warehouse space, according to chief executive Atif Abdulmalik.

OFFICE
US faces headwinds in 2008
The US office sector is expected to face “substantial” headwinds over the next two years as the credit crisis impacts on the country’s real estate markets. Real estate management firm, ING Clarion warned the credit market dislocation would hit the office sector, with national vacancy rates expected to rise to more than 14 percent in 2008. Financial centers such as Manhattan, San Francisco and Boston could be hit as large financial institutions make large-scale cutbacks because of subprime losses, the firm added. As a result, investors were increasingly looking for high-quality office properties in core markets. “Selectivity in regard to market, property location and pricing is increasing in importance,” ING’s report, “Real Estate Investment: Finding Value in a Changing Market,” said. However they added the office sector was poised to experience a strong recovery by 2010 to 2011.

RETAIL
Apollo downplays loss
Apollo Management has reassured investors that the highly-publicized bankruptcy of portfolio company Linens ‘n Things will have a relatively minimal effect on investor returns. The Leon Black-led group has estimated that if the value of Apollo’s investment in the housewares giant – which is set to close 120 stores in the US – were marked down to zero, the gross IRR for investors in Apollo Investment Fund V would drop by only one percent, to 70 percent overall, according to an investor letter obtained by PERE’s sister publication, PrivateEquityOnline. The memo was sent to LPs as Linens ‘n Things’ announced it was filing for Chapter 11 bankruptcy protection. An Apollo-led consortium, including Silverpoint Capital and NRDC Real Estate Advisors, took the New Jerseybased retailer private two years ago. Equity from Apollo accounted for $260 million of the $1.3 billion deal.

RESIDENTIAL
EI exits Homex
Chicago-based private equity real estate firm, Equity International, has sold its remaining stake in Mexico’s largest homebuilder, Homex, six years after first investing in the company. Homex revealed EI, founded by Sam Zell and Gary Garrabrant in 1999, had liquidated 11 million shares in the Mexican firm last month, after gradually reducing its ownership position. In February, EI sold 5.1 percent of Homex to the firm’s founding family. No financial details were released. EI was one of the main investors in Homex in 2002, helping the company list on the New York and Mexican Stock Exchanges two years later. According to EI’s website, the firm played a direct role in Homex’s “transformation from a family-owned homebuilder into one of the leading companies in Mexico.” Announcing the exit though, Garrabrant insisted the share sale would not be the end of EI’s presence in Mexico.