Quick takeout idea: Dalata Hotel (DHG.IR) - Probably gets sold soon

“Sir, you are supposed to check out at…”

“Yes, yes, I’m coming down now!”

Dalata Hotel recently announced a formal sales process. Last few days have been really busy ;ppp and I’ve been using time on the road to conjure my “tin-foil hat” hypotheses and squeezing out whatever spare time I have to eke out this article.

Before going on, I’d like to highlight that amidst the market chaos, there seems to be a fair few interesting things popping - for e.g. last week, I highlighted DLTR selling off its FD stake and how DLTR deserved a rerating; in other news, Intel has also successfully divested its memory chip business (this time, IP and manpower) over to Sk Hynix, netting a ~1.9b cash infusion and also an indication of focus on its core “less-commoditized” logic chips business. Tan Lip Bu also finished acquiring his 25m worth of shares at ~$23.96 per share. Yet, INTC has traded down with the rest of its boys, as the semicon indices continually to get smacked downwards. Exciting times ahead.

Back to Dalata, shoutout to Value Situations, from where I first stumbled upon this name.

*P.s. I actually realized I can’t get shares on this but since this’ve been written, will throw this out for those who can snag some, and frankly just curious to see how this pans

Background

All currencies are in €

Dalata Hotel, is the UK and Ireland’s largest independent four-star operator, operating primarily the Maldron and Clayton Hotels. As of FY24, it operates a total of 30 owned hotels, 22 leased hotels and 3 managed hotels, with a cumulative 11,851 rooms. The firm has another ~1300 rooms in its pipeline and has a goal of expanding to 21,000 rooms by 2030.

Geographically, 44% of its rooms are located in the UK and another 52% is located in Ireland with most of operations focused in Dublin. Continental Europe makes up a small portion of the firm’s portfolio.

Dalata’s key brands are really Clayton and Maldron, Clayton, appearing to be the more upscale one but both, well-established four-star brands.

As mentioned, the firm operates a freehold and leasehold model whereby 55% of its operations are freehold properties, owned by Dalata herself, whilst the other 45% are leaseholds - high-quality long-term leases as per the firm, with a weighted average lease term of 29 years (excluding Clayton Hotel Manchester Airport, which holds a 200 year lease). The firm has gradually transitioned from an ownership model to a lease model (70% owned in 2017).

Operationally, performance has been not been the most fantastic over the recent few years. Inflationary pressures in the form of higher labor costs (~40% of the a hotel’s cost), specifically increases in statutory minimum wages, have chipped away at margins, with the firm not being able to offset it entirely.

Occupancy rate held steady at ~80%. Revenue per available room (RevPAR) grew like-for-like (LFL) 1% in FY24, buoyed by higher room rates. However, as mentioned, costs outpaced top-line growth, leading to LFL EBITDAR margins declining ~1.5% YoY.

Dublin appears to have caused a drag to the top-line growth in FY24 and margin deterioration is the strongest in UK. However, all-in-all, Dalata generates relatively high margins in the industry, probably top decile, with EBITDAR margins at a blended ~40% and EBITDA margins ~30%.

In any case, Dalata is a decent operator in the space, growing revenue consistently and with a juicy operating margin that doesn’t deviate by much through the cycle (ex 2020). Even through the pandemic, despite the travel industry taking a huge hit, Dalata only diluted shareholders by ~20% and overall, where we’re standing, post FY24 share buybacks, dilution has been reduced to ~14% from pre-pandemic levels and the balance sheet is healthier than ever, with leverage ratio down from 2.8x to 1.3x between 2019 and 2024.

As of the the current trading price, Dalata sports a ~€1bn market cap, and a ~€1.3b EV. Pre IFRS 16 EBITDA for FY24 was ~€173m and probably does something along those lines in FY25. FCF (measured as OCF net of maintenance capex) in FY24 came in at ~€123m.

Note, the firm expects RevPAR growth to reaccelerate but will be offset by minimum wages poised to bump cc ~5% in FY25.

Dalata is currently trading at ~7.5x FY24-FY25 EV/EBITDA. On a P/FCF basis, Dalata is trading at an ~9x P/FCF, absolutely cheap.

However, we are not the only ones that think so…

Event

Early this month, Dalata issued a statement, hiring Rothschild and announcing a strategic review and commencement of a formal sale process. As to the seriousness of the matter, the firm carved out a sub-page on their website dedicated to this formal sales process.

The key reasons for such a transaction, as penned in the issued statement, is highlighted in the snippet below:

Note the last line, Dalata affirms that there were no unsolicited bids or discussions behind the curtains at the time of announcement which is ironically interesting, and a good sign in that corporate governance is a b*** in UK and what typically happens is an unsolicited bidder pops in with a bid and management turns em down without consulting shareholders. The fact that there are no extant bids would indicate that management is genuinely open to all bids and serious about selling.

But it’s not so simple of course. Management barely owns much stock to begin with.

Dalata has some pretty chunky shareholders on its register, so I think the process was probably pushed by them (note above, “concentrated shareholder register”). More specifically, I think Al Zahid is “subtly” running a full process but the end goal would be for them to take out this company.

The Board will update shareholders on the progress of the Strategic Review and will make further announcements in due course. There is currently no certainty as to the outcome of the Strategic Review. The Board will engage with shareholders to solicit their views and input into the Strategic Review.

Just have a look where Dalata trades on a price to book value metric, total eye-sore. Post-pandemic, the market has persistently priced the stock below tangible book value, implying that Dalata does not generate a return in excess of its cost of equity, despite the firm consistently putting up a low teens ROIC through the cycle (see ROIC calculation by the firm below, very reasonable). The market is also implying that if the firm liquidates itself entirely right now, it will not get the full dollar, as marked on the balance sheet (despite Dalata recently disposing assets at a premium to book value).

Tracking back a bit

Going over the key shareholders in the register:

Al Zahid

Al Zahid, a Saudi Arabian family office, through its German arm, Perpetua Holdings, began acquiring shares in Dalata at the bottom of the pandemic, sometime from August through October 2020, taking its stake up to ~10% of the company.

A few months earlier, around April 2020, Zahid made another investment, purchasing an initial stake in Barloworld, right after the COVID crash, and quadrupling its position through 2020. This is how a local magazine framed the series of purchases then:

Fast forward a few years and Zahid finally showed their hand with talks of acquiring Barloworld brewing in August last year. A full proposal, with the help of a consortium, came to light in December - a 30% premium to the firm’s unaffected trading price. However, other large shareholders have thrown a mini tantrum citing the bid being too low and are demanding a minimum ~10% sweetener to Zahid’s bid. The current saga is still ongoing.

Barloworld was a cheap stock when Zahid first purchased shares and remains a cheap stock even today. The same could be said of Dalata.

I think Zahid pushed management to do a full process for Dalata, to see if there are bids out there, to sort of get a ballpark range for how much current shareholders are willing to sell the company for, and if no external bid is finalized, it does not seem out of character for Zahid to snap up the entire Dalata at the end of it all.

Eiendomsspar

This brings us to the next player in the picture, Eiendomsspar. Eiend is a Norwegian real estate company and currently holds a ~9% position as of January 2025. Eiend apparently began acquiring shares in Dalata last October, first acquiring a 3% stake, before inching past the 5% stake in November. The timing seems rather odd to me in that while Eiend has been dabbling in the continental European hotel space quite a fair bit, via investments in Scandic Hotels, Pandox etc, they typically are business-synergistic related investments i.e. Eiend owns the hotel real estate, whilst Scandic does the operations thereof. However, for Dalata, Eiend has indicated that this purely a “financial investment”.

With my tin-foil hat on, I have a feeling that Eiend saw that Zahid was intending to snap up Barloworld on the cheap last August and wanted to get in on Dalata before it gets fully taken out, perhaps maybe even have a say in the deal price…?

Ghost bidder ??

On 11 February 2021, a ghost corporate bidder with multiple minority holdings (sounds like an investment firm) hired J.P Morgan AG (the EU arm of JPM incorporated in Germany) and attempted to acquire ~30m shares (~13% of shares outstanding) from existing shareholders at a midpoint EUR 3.60 though the offer did not go through. I highly suspect that this was Perpetua Holdings, the German arm of Al Zahid.

J.P. Morgan AG was recently engaged to act as dealer-manager to intermediate the purchase of a financial investment of up to approximately €110 million in ordinary shares of Dalata Hotel Group plc (the "Company") by a European corporate with multiple minority holdings (the "Purchaser"), at a price between €3.50-€3.75.

The Purchaser engaged with certain shareholders of the Company to solicit interest regarding the potential purchase, however it has decided not to proceed with the purchase at this time.

Given Zahid’s 10% stake, it may have been difficult to acquire more shares in the open market (volume wasn’t that great either, see image below), without slippages and some sort of rumor that a full takeout is in play, which would push the stock price higher. The company would also have to file an RNS every time it increased its position.

Implied valuations

At the current stock price, the implied value is at ~114k/key(room), which is a huge step down from the implied value of ~142k/key pre-COVID, and also lower than the implied ~118k per key when the ghost bidder/Al Zahid came hunting for shares in February 2021. FWIW, Zahid initial stake was done at an implied ~80-90k/key in the depths of COVID.

The implied value/key laid out above is rather interesting as Dalata did a sale-leaseback transaction in 2020 of its Clayton Hotel Charlemont, which apparently cost ~EUR 220k/key to build.

In 2023, Dalata also opened a Maldron Hotel in Finsbury Park, London that cost ~€275k/key.

In its FY24 presentation, Dalata also highlights its value creation history i.e. enhancing its Clayton Hotel Dublin Airport at €135k per key 2018 and selling two assets in Wexford in FY24, for €29.6m at a ~17% premium to 1H24 book value (probably highlighted to underline the firm trading below book value) of which the firm used for share buybacks at below book value; note FY24 is the first year in its trading history that Dalata has repurchased shares.

It appears to me that the company is open to value-unlocking alternatives and maybe, the buybacks were pushed by Al Zahid to thin out the float.

Low-end hotel assets generally go for ~8x EBITDA and higher-end chains generally trade for low teens EBITDA, not factoring in a control premium. Dalata is a pretty mid-chain but its margins are top decline and could conservatively go for a ~10x EBITDA multiple (still where it traded pre-Covid), which would imply a €7.50 stock.

Takeout negotiations would quite likely be anchored by NAV. From the issued statement shown above, management’s first priority appears to be getting a price that at minimum, reflects the asset base.

With regards to that, Dalata estimates its freehold portfolio to be €6.67 per share. Add an additional sweetener value on top for the leasehold portfolio (which is now a substantial % of rooms) and its growth pipeline and it’s not difficult to triangulate north of €7 per share.

The market is ascribing a 23% odds of a deal here. Let’s see.