The Sovereign Group, an investment fund associated with the family and allies of former president Daniel arap Moi, stands a good chance of snapping up the prestigious Nairobi Intercontinental Hotel as the state prepares to offload its stake in one of the landmarks of thecapital city.

The government, through the Kenya Tourism Development Corporation (KTDC) owns 33.8 per cent of Kenya Hotel Properties Ltd, the entity that in turn owns the 389-room hotel — one of the biggest in Nairobi, with gross assets worth Ksh3 billion ($33 million) as at December 2008.

When the Cabinet recently decided that the government’s stake in the hotel — and in three other hotels being privatised — be offered to existing shareholders through pre-emptive rights, the door was opened for Moi and his allies.

The implication of this is that the shares being offloaded cannot be offered in the open market until existing shareholders, of which Sovereign Group — the largest individual local investor — and other shareholders have been given a chance to invest.

The Intercontinental Hotels Corporation Group, which is listed in both the UK and the USA, has a 33.8 per cent stake in the hotel group.
The only other individual shareholder with a sizeable stake in the group is the Development Bank of Kenya, with 12.9 per cent.

The Sovereign Group will, however, have to fight it out with the International Hotels Corporation, which recently demonstrated its appetite for expanding its operations in East Africa’s largest city by establishing the Crowne Hotel brand.

The Intercontinental Group Plc has been running and managing the hotel under a 99-year lease since April 1967.

But the dynamics could change if the hotel attracts interest from the Transcentury Group, the local private equity fund founded by a group of local acquisition artists and allies of President Mwai Kibaki.

On the face of it, Transcentury does not qualify as an existing shareholder of the existing company. But the group has indirect interest in Kenya Hotel Properties Ltd through the Development Bank of Kenya, in which it has a 10 per cent stake.

The government is also offloading its 40.5 per cent share in another of Nairobi’s landmark hotels, the Nairobi Hilton.

It is not expected to attract much local investor appetite since International Hotels Kenya Ltd, the entity that owns the Nairobi Hilton, only has two shareholders, namely the government and the Hilton Group, which has a 59.4 per cent shareholding stake in the company.

Any local investors wanting to come in will have to deal with the Hilton Group, which has pre-emption rights over the shares being offloaded by the government.

Under the circumstances, the government will have to offer the shares to the Hilton Hotel International Group.

In the event that the parties do not agree on price, the shares will be put on the market for other interested investors.

Established in 1969, the 287-bed hotel is currently leased to the Hilton Group of the UK. As at December 2008, its gross assets were estimated at Ksh2.5 billion ($28 million).

The scramble for the third hotel being offered by the government — the 42-bed Mountain Lodge Hotel — may turn out to be more complex.
Situated within the Mt Kenya National Park in a property under lease from the Kenya Wildlife Service, its share register has in excess of a dozen names, a good number of them local businessmen from the Mt Kenya region.

KTDC is the largest shareholder in the company with 39. 1 per cent, followed by the TPS Serena Group with 29.9 per cent and other individuals

The government has chosen to dispose of the shares in the three hotels in the hope that the international brands will have the leeway to inject more capital into refurbishing the hotels.

Indeed, despite constant pressure from the international investors and even as the hotels badly needed refurbishment, KTDC had been resisting any more capital spending on the hotels as it feared that its shares would be diluted.

Until 2009, the wisdom in government was to privatise all KTDC assets. That was the gist of a joint Cabinet paper by the Treasury and the Ministry of Tourism that was approved by the Cabinet in June 2009.

Indeed, the Privatisation Commission went to the extent of appointing investment bankers, Dyer and Blair Ltd to structure the transactions.

In March this year, the Office of the President put out a circular announcing that the government had decided to approach the privatisation of KTDC by a different route. Only shares in hotels being run by international brands would be offloaded.