Ocean Link, Sequoia seal China hotel operator take-private

The company ceased trading in Hong Kong on May 24. In addition to the privatization – via a general offer at a valuation of HK$1.3 billion ($167 million) – the GPs took out privately-held domestic shares. With some shareholders rolling over their interests, Ocean Link and Sequoia ended up committing HK$1 billion to the general offer and paying RMB394.1 million ($61 million) for the domestic shares.

Ocean Link, a specialist investor in travel, tourism, and consumer technology assets, is contributing HK$480.5 million via its second fund, which closed earlier this year at $580 million. Silicon Valley Bank is facilitating the commitment with a standby letter of credit. Sequoia is investing HK$1 billion from its sixth China growth fund. The vehicle closed at $2.8 billion in 2020. 

The investors have a call option, exercisable at any time within 12 months of the delisting, on another portion of domestic shares being rolled over by the majority owner. This would see them invest an additional RMB570.8 million.

The buyout offer was submitted in January when New Century Hotel was dealing with the fallout from a COVID-19-blighted first half in which occupancy rates and average daily rates across all its properties plummeted. Days later, the company issued a profit warning, stating that net profit for 2020 was likely to be down 80-90% year-on-year.

They were willing to pay HK$18.15 per share in cash for all outstanding shares, a 24.7% premium to the January 18 closing price. This was conditional on winning support from at least three-quarters of independent shareholders. The domestic share offer was RMB15.18 per share.

Investors representing 81.1% of the total issued shares – across the Hong Kong-listed and domestic tranches – agreed to sell via the general offer or rollover their interests into the acquisition vehicle. Supporters included Ctrip, a strategic backer of Ocean Link, and members of the Chen family, which controls New Century Group, one of China’s largest hotel operators and New Century Hotel’s parent.

As of year-end 2020, New Century Hotel operated 40 hotels, two wholly-owned and 38 under lease. It also served as the contracted manager of a further 271 properties, either under full-service management agreements or franchise agreements. There were 59,231 rooms across both categories. Including pipeline properties that have yet to open, it was responsible for 109,365 rooms in 589 hotels.

Of the properties operated by New Century Group – upscale business hotels, upscale resort hotels, mid-scale full-service hotels, and mid-scale select service hotels – average occupancy rates ranged from 41.9% to 53.7%, compared to 57.1% to 62.4% in 2019. The utilization of seats in its food and beverage establishments fell from 72.4% to 51.7%.

Revenue came to RMB1.59 billion in 2020, down from RMB1.93 billion the previous year, while net profit dropped from RMB204.9 million to RMB26.6 million. The hotel operation segment generated RMB1.41 billion in revenue while RMB189.7 million came from hotel management.

This is the third take-private of a listed Chinese company that Ocean Link has participated in since 2019, having initiated the acquisition of classifieds marketplace 58.com and joined the consortium that bought eHi Car Services. The 58.com and eHi deals are two of just five $1 billion-plus PE-backed China take-privates announced or proposed during the period.

Tony Jiang, a co-founder and partner at Ocean Link, previously told AVCJ that his firm’s relatively high level of activity in this subset of the market is the result of targeting assets that are out of favor. Hotels and hospitality in a post-COVID-19 world might be seen to fit this profile.

“Valuations are high in this environment but if you look at the companies doing take-privates, there is often some controversy around them, it’s never straightforward. It's all about how we assess risks and fix these problems,” Jiang said. “We are not passively backing hot entrepreneurs.”

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• Topics
• Greater China
• Real estate
• Consumer
• Buyouts
• China
• Travel
• Ocean Link
• Sequoia Capital