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Investing in paradise

In yet another hospitality megadeal, several private equity and real estate firms are taking Kerzner International private.

There's no doubt about it, gaming is big business these days, and private equity real estate firms are starting to get in on the action. Kerzner International, the Bahamas-based hotel and casino operator, has agreed to be taken private by a consortium of private equity and private equity real estate firms in a $3.6 billion (€3 billion) deal.

Kerzner is the largest casino operator in the Caribbean, and has its flagship resort/casino, Atlantis, on Paradise Island in the Bahamas. Incorporated in 1993 under the name Sun International Hotels, the company owns and manages casino resorts around the world, including Mohegan Sun in Connecticut, Sun City off the southern tip of Africa and a planned 60-acre water park in the desert of Dubai.

The deal will take Kerzner off the New York Stock Exchange, where its share price has rocketed from $20 per share in 2003 to roughly $80 per share today. The deal involves an offer of $76 per share and the assumption of $599 million in debt.

The consortium of investors includes Dubai-based Istithmar PJSC, Goldman Sachs' Whitehall Street Global Real Estate, Colony Capital, The Related Companies and Providence Equity Partners. It also includes Sol Kerzner, the founder of the hotels group, and his son Butch Kerzner, who will double their ownership in the company to 24 percent.

Los Angeles-based Colony Capital has been aggressively buying hotel and casino assets under the leadership of Tom Barrack, a former official in President Ronald Reagan's administration (see p. 38). Colony has spent more than $12 billion since 1991 on a variety of properties like The Savoy Group and the Las Vegas and Atlantic City Hilton hotels.

Istithmar, a Dubai investment bank, is operated by the United Arab Emirates government holding company The Corporate Office, or TCO. TCO also owns Dubai Ports World, which attracted controversy when it acquired a British company that manages US ports earlier this year.

Kerzner and Istithmar previously formed a joint venure to develop another Atlantis in Dubai. The resort will include a 1,500-room five-star hotel and a water park.

Under the terms of the deal, Kerzner can solicit more proposals during the next 45 days to look for a better offer. However the consortium of investors will receive a break-up fee of $30 million if the deal falls through because the company accepts a higher bid. Some Kerzner shareholders have complained that the bid is too low, but analysts are skeptical as to whether the company will be able to find a higher offer, though Starwood Hotels & Resorts has been suggested as a possible suitor.