Hendrickson lays out new plan for Pegasus

Sabrina Gordon, Business Reporter

Kevin Hendrickson is prepared to pump another J$800 million into The Jamaica Pegasus hotel, to buy its old equipment and fixtures and upgrade the hotel plant over three years, but in return he wants a 25-year lease of the property that would be worth close to US$48 million by Financial Gleaner estimates.

At the same time, Hendrickson's company, Quivin Holdings Limited, the new majority owner of Pegasus Hotels of Jamaica Limited, said Wednesday that it is no longer interested in delisting the company, but would proceed to do so if the mandatory offer to minority shareholders, now back on the table, nets subscriptions above the 80 per cent threshold.

Stock market rules mandate that no single shareholder can own more than 80 per cent of a listed company.

Quivin Holdings paid US$11 million (J$940.5 million or J$13.14 per share) for 59.81 per cent of Pegasus, triggering a mandatory offer to minority shareholders at a similar price per share.

Shareholders have until 3 p.m. on April 28 to subscribe to the offer, but already the hotel company's Take-Over Bid Advisory Sub-committee has recommended that they hold on to their shares, saying that Pegasus had prospects for future profitability, either under its current arrangement or the proposed lease agreement that Hendrickson is seeking.

Quivin's shift in position comes as it reports that its due diligence on the hotel company revealed an operation that was more indebted and far less capable of generating revenue than originally estimated.

Hendrickson got the approval of the Pegasus Hotels of Jamaica board on March 28 to lease the hotel to Surrey Hotel Management Limited, a new company he created for the purpose.

He is demanding terms of US$1 million for the first year of the lease, US$1.2 million in the second year, US$1.4 million in year three, and thereafter the management fee would increase at the rate of US inflation, capped at three per cent.

In the first three years, the lease is worth US$3.6 million, or about J$308 million at the spot exchange rate. In 25 years, the lease agreement could earn US$47 million to US$47.6 million at two to three per cent inflation. The US annual inflation rate was at 2.11 per cent in February.

Quivin Holdings, in return, is committing to invest J$500 million in plant upgrade and other capital expenditure over three years, and to purchase all furniture, fixtures and fittings at book value, estimated at J$302 million. Quivin is also prepared to assume all risks and costs relating to the hotel's operations going forward - including maintenance, insurance and property taxes - its new take-over offer to minority partners said.

instructions

Hendrickson was not available for comment.

Lance Hylton, the lawyer for Quivin, said the offer notice is a requirement for Quivin Holdings to say to shareholders what its plans are for the hotel so that they can decide whether to stay in as investors or not.

The document also offers instructions to shareholders, who want to recant on their acceptance of the offer when it was first floated, on how to withdraw.

Quivin in its offer circular said the lease arrangement will result in Pegasus Hotels of Jamaica becoming a "purely landlord company with nominal expenses".

"It will be in a significantly better position than it has been for some time or would otherwise be with significant cash surpluses and project profitability," the notice stated.

Pegasus Hotels has been running losses over the last several quarters, and was reported to be J$63.7 million in the red in the 10-month period ending January 2011, compared to a budgeted profit of J$25.9 million.

Although attributing some of the losses to events outside the hotel's control, Quivin contends that the company's performance is one that has been historically poor and has failed to meet its budgets in four of six financial years.

Quivin also reported that the hotel company paid out J$204 million in dividends over the last five years, exceeding net profit of J$149 million; while borrowing J$250 million in the same period.

The hotel generated cash of J$571 million over the five years, and re-invested J$503 million in capital expenditure, but "continued to show disappointing occupancy and revenue results," the offer document said.

Hendrickson's plan to pump the additional funds into the hotel was based on the assumption that the property as is would not generate the necessary cash to finance capital spend and debt financing, nor attract new equity financing.

"We believe that major refurbishing and modernisation are required to make rooms more attractive, to upgrade and remodel the public areas, to restructure the work areas, to re-equip kitchens and other production areas and add additional amenities," said the bid circular.

"All this in order to improve quality and in an attempt to increase revenue."

Quivin is also holding out the enticement of dividend to minority shareholders, saying: "In this lease scenario, we project that the company will be in a position to pay dividend every year for the life of the lease."

Once the lease contract is sealed, Surrey will restructure the operations and start recruiting staff.

sabrina.gordon@gleanerjm.com