Every now and again, John Bairstow likes to go fishing: “It clears the mind, helps you think,” he tells advisers who happen to be wrestling with his latest deal. On his return, the deal is done — or it is not. It is as simple as that.
Bairstow’s relaxed manner has become well practised after Queens Moat struggled through difficult times during the 1974-76 property slump. It has helped the company to become the owner of 175 hotels across Western Europe, collectively valued at £1.8bn.
Queens Moat is within an ace of becoming the latest member of the exclusive club of companies in the FT-SE 100 index. Before long it will be making more money from the Continent than the UK, where prospects are temporarily less exciting.
It is cautiously looking at opportunities in Eastern Europe, particularly Berlin, which Bairstow reckons could evolve to rival London’s financial clout in the 21st century. But anyone expecting QM to make dramatic moves outside the hotel sector, or dash into areas outside Europe, will be sadly disappointed.
John Bairstow (shown here) is an entrepreneur, who left school at 15 and, after finishing national service at the age of 25, built an estate agency which evolved into Bairstow Eves. It was Bairstow Eves which hit the headlines in 1982, when Bairstow decided to float it on the stock market at an initial £6.8m. He was amazed at the price which stock market investors were prepared to pay for its shares: “I just couldn’t believe it,” he recalls. “I could make no secret of the fact that I’d be willing to sell.”
In 1986, Bairstow sold Bairstow Eves for £77m to Hambros Bank. BE went on to merge with Mann & Co to become part of Hambro Countrywide, whose shares have been treading water for some time. Bairstow shakes his head at the recent news that the Prudential stands to make a hefty loss on the proposed sale of its rival estate agency chain, but does not crow: “Its boss, Mick Newmarch, is a friend of mine,” he explains.
Although BE was John Bairstow’s first creation, it was QM which evolved into his main business interest. He and his wife Joyce founded the chain by converting their Tudor home in Brentwood into a 17-room hotel with the help of a £45,000 bank loan.
“In those days there was a shortage of high-quality provincial hotel space,” says Bairstow. His new hotel, the Brentwood Moat House, began to fill the gap. Bairstow made the Tudor Rose his crest because the building is reputed to have been built by Henry VIII for his first wife, Katharine of Aragon, becoming a royal hunting lodge in 1512.
Bairstow aimed to tap Britain’s businessmen for business. In 1972, he reversed his embryo hotel operation into a company called Queens Modern Hotels. He became chairman of the group, renamed Queens Moat, in 1973. His key lieutenants, Martin Marcus, David Hersey, Leslie Barker and Gerald Bell were all with him in those early days, and have stayed loyal.
In those days QM dabbled in everything from property to plumbing. But when the company hit problems during 1974-76, Bairstow cut away all its non-hotel operations. He also slashed central office overheads by putting his hotel managers more directly in command of their finances.
Under this scheme, which is now in place for the bulk of the chain, QM agrees profits targets with the managers of hotels. If the managers exceed these targets, they keep the surplus; if they don’t, they make up the difference out of their own pockets. In the mid-1970s, the personal guarantees on future profits made by hotel managers reassured QM’s worried bankers; the system, also being applied on the Continent, gives its managers incentive.
“It’s down to a manager to live or die by his own application,” one manager said. “We are frequently seen with our shirt sleeves up, washing the dishes.”
When the good times are rolling, QM gets criticised for putting limits on its upside profits potential. But the company reckons that it has quite enough hotels where the management scheme does not apply to provide thrills and spills. And, add brokers Barclays de Zoete Wedd: “It is a strong defensive characteristic in difficult times.” In the year to end December 1989, QM increased pre-tax profits by 48% to £62.4m.
QM entered the 1980s with net assets of £10m. The deal which set it on the path towards net assets of £1.2bn by the end of the decade was the purchase of a string of hotels from Sir Max Joseph’s Grand Metropolitan.
Sir Max Joseph agreed to sell QM 26 provincial hotels for £30m. It was a big deal for QM, which financed it through a hefty £14m rights issue, placement of shares with Grand Met and bank debt. At the time, Sir Max wanted funds to purchase the Intercontinental group of hotels from Pan-Am. “He wanted me to buy even more of his old portfolio,” says Bairstow. “He said, ‘Go on, take them! Take the lot!’ If only we’d been large enough…”
After the Grand Met deal, QM owned 52 hotels, with strong representation in the southern part of the country. It also acquired the services of former Grand Met man Bob Abson, who is now QM operations director. Bairstow likes to keep the key people at any company he acquires.
In the mid-1980s QM bought a central London hotel, in Drury Lane, a major operation in Stratford upon Avon, and five Saxon Inns. However, hotel prices in Britain were soaring way beyond levels which Bairstow was willing to pay, though he continued to expand greenfield operations, sometimes with the help of the Business Expansion Scheme.
By good fortune, Bairstow was offered the chance to buy the Bilderberg hotel group of Holland at the end of 1986. The £47m deal, which brought QM 12 more hotels, was struck within 48 hours of Bairstow’s first meeting with Bilderberg’s supervisory board.
Less than a year later, QM snapped up another 24 hotels for £148m in Germany, the Netherlands and Belgium. Of these, 16 were Crest hotels bought from Bass; the rest, trading under the Holiday Inn name, were bought from Munich-based Roland Sturm’s Globana. The average price per room, according to Bairstow, was £43,000, against the £75,000 to £90,000 being asked for comparable hotels in Britain.
QM has always liked to buy when the price of acquisition is low because an existing hotel generates money from day one, and can be expanded and improved relatively cheaply. It can take five years to build a hotel and raise it to full profitability, though Bairstow would be the first to acknowledge that the effort can be well worth while, if the site is cheap enough and the position is right.
Bairstow’s opportunity to buy built property in the UK did not arise again until a bear market finally cut the expectations of vendors down to size.
Early this year he struck, by making a £175m bid for Norfolk Capital, the hotel group run by Peter Eyles and chaired by Lady Joseph (widow of the former boss of Grand Met).
This was a rare hostile move by Bairstow, who prefers to do deals by agreement. It was provoked by moves to wrest management control of Norfolk by Balmoral International, a private concern run by Peter Tyrie.
Tyrie had headed the buy-out of the Gleneagles group from British Rail in the early 1980s. Gleneagles was later bought by Arthur Bell; much to the surprise of observers, Tyrie stayed alongside its ascerbic boss, Raymond Miquel, until Bell’s takeover by Guinness. Tyrie then went to Hong Kong to run the Mandarin hotel empire; he found it easy to find backing for Balmoral, a start-up company, in the summer of 1989.
Even at this stage, it was clear that Norfolk was Balmoral’s most likely target, though Tyrie was publicly non-commital. In November 1989, Balmoral acquired a 13% stake in Norfolk. Tyrie men angled for control of Norfolk by lobbying its shareholders to put his people on the board rather than making a takeover bid.
Norfolk Capital was the owner of 14 hotels catering for upmarket business types, including the Caledonian in Edinburgh and Eastwell Manor, a country house hotel in Kent. It had been sorted out by Peter Eyles in the early 1980s, with the help of the issue of highly priced shares. However, its stock market image was badly dented when it came up with a rights issue just before the October 1987 stock market crash to help with the purchase of the three St James’s Clubs from that brilliant master of timing, Peter de Savary.
“The St James’s Club acquisition has proved to be a disaster,” says Barclays de Zoete stockbroker Wedd. “High profits achieved by the London unit have been offset by losses in Paris and start-up costs in Los Angeles.”
Bairstow reckoned that Norfolk House shareholders would prefer to take his 2 for 5 share offer than put their trust in Tyrie’s undoubted talents. He was right, and succeeded in taking control of Norfolk without raising his offer.
“I regret not making my offer final from day one,” says Bairstow, well aware that the City tends to expect initial bids to be upped, even in the middle of a bear market. He is aware that he has regularly tapped the City for support through rights issues in the 1980s, and doubtless will again.
Bairstow bought Norfolk Capital cheaply enough to guarantee that earnings per share growth will be nurtured, not stunted, through the latest share issue. He has also managed to expand QM’s net asset base, in preparation for the next deal. Net debt of £753m earlier this year represented 59% of shareholders’ funds.
QM has sold the North British Hotel, Edinburgh, and Old Swan Hotel, Harrogate, out of the Norfolk Capital portfolio to a forgiving Balmoral International for £45m. Bairstow had planned to sell Norfolk’s St James’s Clubs through US merchant bank Salomon Brothers, but was not able to find a purchaser at around the book value of £58.5m.
Most recently, QM has pulled off the purchase of a 49% stake in a French company called H I Management, courtesy of a down payment of £30m. It has an option to buy the remaining 51% for a maximum of £48m before April 1993.
HIM carries debt of £62m, though QM will not have to take the debt on to its balance sheet until it buys total control of the group. Net cost per room will work out at around £70,000.
As part of the deal, QM has inherited an administrative office and further Holiday Inn franchises. Eight of HIM’s hotels are in France; two are in Belgium. The business should break even this year, and move into profit by 1991.
Brokers now expect QM to make profits of £95m in calendar 1990, rising to £115m the year after. Some £71m should come from QM’s older UK hotel portfolio (on an indicated margin of 25.8% on sales of £335m); Norfolk Capital might account for £12.5m (25%); German hotels should bring in £32.5m (32.5%); and hotels in Benelux £18.5m (24.7%).
John Bairstow is greatly impressed with margins available in Germany, and the drive of the local workforce: “People worry far too much about how Continental businessmen might react to working for a UK owner,” he says. “I have found that they welcome our management approach.”
After enjoying “great success” with a hotel in west Berlin, he is now investigating possibilities in east Berlin. But he will not be rushing into anything; “I am particularly worried about the need to secure titles to land ownership,” he said, pointing out that exiles from the East might well be able to claim the birthright taken away from them by past armed invasions.
Bairstow concedes that growth prospects in the UK have been dimmed by recession. But he will hold, and build on to, what he has over here.
He was intrigued by Sir Ron Brierley’s success in taking control of Robert Peel’s Mount Charlotte hotel group through a £600m cash bid, which he, like most people in the industry, regards as cheap. Mount Charlotte fell from grace by taking over Scottish & Newcastle’s Thistle hotel chain at the top of the market, and then failing to make promised hotel sales of £200m on schedule.
The removal of Mount Charlotte from the stock market listings means that a proportion of the cash received by institutions should be reinvested in QM, whose shares at 92p would stand on a 1990 prospective earnings multiple of around 10.5 and a significant discount to assets per share of 126p. QM also has the advantage of being a significant European player: it is a purer hotel play than international leisure rivals Trusthouse Forte, Ladbroke and Bass.
In due course, its shareholders will face — and help to finance — another of Bairstow’s quantum leaps. Chances are that the move will be overseas, with QM’s 9% stake in Vaux, the brewer-cumhotelier, no longer seen as the springboard for a hostile bid. Lateral moves, such as QM’s purchase of the Boulestin restaurant, Covent Garden, and backing for one or two small property ventures, will not distract QM from expanding its key hotel business.
Thankfully, when it comes to quantum leaps, Bairstow has a reputation for getting the risk-reward ratio right. Once, he was toying with the possibility of buying S&N’s Thistle chain when Mount Charlotte was also looking at it, but decided that the timing was wrong and the price was too steep.
Doubtless as a result of another successful fishing trip.
