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Too Much Of A Deluxe Thing?


BusinessWeek Investor -- The Barker Portfolio

Too Much of a Deluxe Thing?

Life with Louis, so the story goes, had Marie Antoinette stressed to the max. Then the Sultan of Morocco showed up at court. He rescued her with a "Four Hands Massage," administered by two eunuchs from his harem. Sound good? Soon, you can be like Marie at the new Ritz-Carlton, New Orleans. "Two trained therapists perform a symphony of movements in synchronization," hotel promoters say. Next come "hot oils, mixed with essential oils, plant and flower extracts."

That strikes me as way, way over the top--which makes me way, way out of it. "Baby boomers rank a luxury vacation with eating and paying the mortgage. It's a birthright," observes Bjorn Hanson, a PricewaterhouseCoopers partner who has studied the lodging biz since 1973. That's why profits on ritzy travel are spurting like the fountains of Versailles. It's also why your broker may soon be pitching you on an initial public offering in Orient-Express Hotels.

Besides the luxury train, the company owns such upscale oases as Hotel Cipriani in Venice, the Copacabana Palace Hotel in Rio de Janeiro, and Manhattan's `21' Club. These choice spots and many more have been collected since 1976 by Sea Containers, a Bermuda shipping and ferry company. It now aims to spin off the properties, under the Orient-Express name, in two steps. In the IPO, set for early August, it plans to sell 10 million shares, about one-third of the business. Sea Containers then intends, next year, to hand out the remaining Orient-Express shares to its stockholders.

IPOs are cooler this summer than last, but this deal could prove hot. Orient-Express netted a record $35 million in 1999. Through June this year, it saw profits grow another 20%. Shares in Four Seasons Hotels, its nearest analog, keep hitting highs. By contrast, Orient-Express may look cheap. At the expected IPO price of $20 to $23, Orient-Express would go for half the 33 times cash flow commanded by Four Seasons.

Just the same, I think there are three big reasons you should consider sitting out this IPO:-- The RC Cola Syndrome. After Coke comes Pepsi, and after Pepsi comes...what? Four Seasons and Ritz-Carlton, a unit of Marriott International, lead the luxury lodging industry, with Orient-Express and Mandarin Oriental behind them. As all four strive to grow, the leaders enjoy an advantage in luring developers with the best sites. They also have a financial edge, which is plain when Orient-Express is compared with Four Seasons (table). Although smaller by revenue, Four Seasons enjoys fatter profit margins and greater cash flow, and is less in debt.-- The Inside Game. Like Sea Containers, Orient-Express will have two classes of stock. That will help founder James Sherwood and his 39-year-old stepson, Simon, who has run the hotel unit since 1994, stay in control. Neither Sherwood is talking, but a spokesman told me: "You have a founder-entrepreneur personality at the helm. [Two classes of stock] is not too unusual." Yet others tell me outsiders run a risk. "Sherwood runs it like his own little fiefdom," said Brett Barner, a SunTrust Banks money manager with a longtime stake in Sea Containers. One example: Securities filings note that Sherwood owns an apartment in Hotel Cipriani. When he's away and a guest takes it, he gets half the room rate. In 1999, that paid him $125,000.-- When More Is Too Much. Analysts remain bullish on luxury hotels. But I have to wonder: When do we hit luxe glut? Even as Orient-Express aims to expand, Mandarin Oriental has set its sights on growing from 7,000 rooms to 10,000. Four Seasons, which now runs 48 hotels, has 19 in development. Ritz-Carlton, with 35, has 25 more coming. Meantime, PricewaterhouseCoopers sees inflation-adjusted growth in revenue per "upper upscale" room tapering off from 2.1% in 1999 to 1.4% in 2000 and 0.5% in 2001.

Is there still money to be made on luxury travel? Sure. But, as Marie Antoinette found, lavish living can come to a sudden end.Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711By Robert BarkerReturn to top


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