The Brown Hotels chain, which operates dozens of hotels in Israel and abroad, is in financial difficulties. Its debt is estimated at at least NIS 100 million, it faced lawsuits that exposed complicated financial problems, and of course it is operating under difficult day-to-day circumstances in Israel, because of the war and its impact on tourism. All this amounts to a considerable challenge.
It is no surprise then that the chain is conducting what it describes as "talks on cooperation", and that it is reportedly seeking a new investor who might even take over control. It turns out that there are several parties jumping at the opportunity, despite the large debt and the difficult situation in the hotels sector. What do they see beyond the chain’s woes?
Debt of NIS 100 million (a conservative estimate) is no small matter. Legal proceedings were brought against the chain and its owner, Nir Waizman, alleging breach of two agreements for loans financing Waizman’s investment in Hagag Group’s MOMA project in the Florentin district of Tel Aviv. This month, the lawsuits were dropped, after Waizman reached a settlement against the lenders - his brother-in-law, and an employee of the chain. It emerged that the chain and Waizman had personally guaranteed the loans, which were for 4.5 years at 17% annual interest, with the chain having the option of repaying them in the form of an apartment in the MOMA project or in cash.
Among the parties that have reportedly expressed interest in taking over Brown Hotels is Israel Canada (TASE: ISCN), which has a hotels subsidiary that was set up in 2019. The company actually tried to buy the Brown chain a year ago, as part of a move to expand in the hotel industry, but in the end no agreement was reached.
It would appear that there are two main reasons for the interest in the chain. One is the chain’s perceived potential. The other is the desire of many players to gain a foothold in the local hotel industry. "It’s no secret that many companies in Israel seek to enter the hotel industry in a substantial way," says Itai Shafran of real estate consultancy Pitronot. "Israel Canada is already in, and there are other big names such as Azrieli and Hagag Group. There is high demand at present for tourism facilities in Israel, and it’s certainly an area of interest to companies with liquid cash.
"These companies seek to diversify their asset portfolios as much as possible, and seek new opportunities, which currently exist in the hotel business. The Brown chain is a good example. Its hotels are in fantastic locations, in the biggest tourist spots, in city centers. Almost every hotel in the chain offers an excellent location with huge potential. There may be some hotels in need of renovation and upgrading, but a chain like that, with hotels in such locations, in the center of Tel Aviv, Jerusalem, and Eilat, holds the potential for a big bonanza for whoever buys control of it."
"The return that the chain offers is wonderful," says a hotel industry source, "and despite the many black swans that it’s having to deal with, including the current crisis that has brought occupancy in hotels in Tel Aviv down to 45% since the start of the war, it’s still working well. There’s no doubt that a new investor will help it, and will give it strong backing that will enable it to concentrate entirely on the work of running hotels."
The big question is what an investor will do with the accumulated debt. That may be the main obstacle to finding a suitable partner. Industry experts say that it is not certain that an investor will agree to take on all the debt, but they estimate that he will have to assume at least a portion of it. The calculation will presumably involve the chain’s business potential as an investment that could pay itself back quickly once the tourism industry recovers.
The Brown chain, as mentioned, operates hotels in Israel that are mostly in the main tourist spots of Tel Aviv, Jerusalem, and Eilat. It also has hotels in Greece and Croatia.
The chain’s financial difficulties mainly stem from the crises that have hit Israel’s tourism industry since 2020: the global Covid-19 pandemic in 2020-2021, and the Swords of Iron war since October 2023.
According to the latest figures published by the Central Bureau of Statistics, there were 1.2 million overnights by tourists from overseas in Israel between January and July this year (the figure is for the number of overnight stays, not the number of tourists). This compares with 5.8 million overnights in the corresponding period in 2023, representing a dramatic fall of 80%.
Shafran sees the industry’s current situation as far from ending, and so the Brown chain is looking for a new direction. "Experience of past crises indicates that the current situation will affect the tourism industry for at least another four years, certainly when it’s a matter of a long and difficult war such as we are now experiencing. The expectation is that there will be 1.6 to 1.7 million incoming tourists this year, versus more than 4.5 million in 2019, that is, a third of the peak.
"As I said, Brown has very high quality assets, but they clearly can’t withstand this situation of very low occupancy rates for long. You have to understand that Brown has perhaps been hit harder than anyone by the current crisis, more than Isrotel and Fattal, for example, because it’s very oriented to free independent tourists from overseas, and its hotels are located in the areas most in demand by these tourists, so it has taken the worst blow of all the players in the tourism industry."
Published by Globes, Israel business news - en.globes.co.il - on September 11, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.