The gloves are off.
The ongoing rift between HNA Group and NH Hotel Group shareholders took a new turn, as HNA, the new owner of Carlson Rezidor Hotel Group and 29.5-percent owner of NH Hotel Group, took Hesperia owner Jose Antonio Castro to task for what it calls "repeatedly rejecting terms" respective of hotels Hesperia owns.
NH Hotel manages 28 hotels for Hesperia.
In a letter to shareholders, written by Charles Bromwell Mobus, Jr., the former Chair-of-the-Board for NH Hotel Group, HNA said it was "deeply concerned about the contract that the NH Hotel Board of Directors, controlled by Oceanwood’s Alfredo Fernandez, is entering into with Jose Antonio Castro, the owner of Hesperia."
The letter made the case that many of the hotels Hesperia owns are "badly in need of renovations that Hesperia cannot afford," and that for more than a year, NH Hotel’s previous CEO Federico Gonzalez, who was ousted by the Board, had "attempted to negotiate a management contract with Mr. Castro that would provide €24 million of capital for the required investments, to be paid over a period of three years."
In exchange, Hesperia would have been agreed to install NH Hotel as the hotels' manager under a long-term contract.
According to HNA, these terms were approved by NH Hotel’s previous Board, which also insisted that the contract provide NH Hotel’s non-Hesperia shareholders with adequate protections by guaranteeing that:
- The cash payments to Hesperia were used to renovate the hotels, not to service Mr. Castro’s substantial outstanding debt which comes due in December 2017.
- Mr. Castro could not terminate the management contracts before NH Hotel recouped its €24 million payment to Hesperia through appropriate and financially secure termination penalties.
- Mr. Castro did not receive an accelerated lump-sum payment at the expense of NH Hotel’s non-Hesperia shareholders through a less stringent early termination provision upon a change of control (such as a transaction with HNA).
- Restricted Mr. Castro’s ability to receive payments from NH Hotel and then terminate or default on the contract in order to “sell” it to a new third-party, thereby profiting the same management contract twice.
But Castro, for his part, has reportedly rejected these terms, thus, as HNA put it, "creating an impasse with NH Hotel’s previous Board that could only be solved by taking insurgent action to reconstitute the Board and empower a more amenable Chair, Alfredo Fernandez."
Further in the letter: "Based on the recent disclosure of a new management contract between NH Hotel and Hesperia, it appears that Mr. Fernandez has fulfilled his end of the bargain by rubber stamping a sweetheart contract that rewards Mr. Castro for his support of Mr. Fernandez and Oceanwood."
The new management contract with Hesperia:
- Pays Hesperia €31 million, substantially more than the amount unanimously approved by the prior Board and supported by prior management.
- Substantially dilutes the change of control provisions to Mr. Castro’s advantage by stipulating broadly that if HNA were only to consider a transaction with NH Hotel that Mr. Castro would be allowed to terminate the management contract early and sell the it to another hotel company without any clawback provisions requiring him to repay the €31 million to NH Hotel.
- Allows Mr. Castro to “secure” the relatively limited termination penalties by pledging a minority share of his majority share ownership in several real estate assets purportedly “owned” by Mr. Castro. These real estate assets have no value as Mr. Castro, as majority share owner, can prevent their sale – or potentially borrow against them – assets to the point of destroying all equity value.
The letter continues: "Further, we understand that virtually all of Mr. Castro’s assets, including his NH stock and any real estate holdings, are already pledged to Banco Santander which owns the loan coming due in December 2017. Given that Mr. Castro recently released 50 percent of his NH Hotel shares to Santander in order to cover part of his debt repayment, and the fact that the value of his remaining stake in NH Hotel has decreased significantly along with NH Hotel’s share price, we believe that his debt is greater than the value of his NH Hotel shares. Pledged as collateral, his net equity in his real estate assets is already unlikely to have any value."
In a letter sent to the Board, Mobus wrote that "prior to the disclosure of the new contract, the Board could not have possibly completed a comprehensive credit analysis on Hesperia as inadequate information had been made available for such an analysis to be conducted."
In it, he asked the Board to retain an independent financial advisor to conduct an analysis and provide a fairness opinion to NH Hotel non-Hesperia shareholders (not the Board) before entering into any new contract with Hesperia.
This new contract included a new provision providing for due diligence to be performed by NH Hotel—"a step in the right direction," but one that comes too late and falls too short, Mobus asserted.
Thus, "HNA therefore reiterates its call" for the following:
- An independent third-party review of the contract.
- The delivery of a fairness opinion to NH Hotel shareholders exclusive of Hesperia and Oceanwood.
- The elimination of contractual terms that serve to enrich Mr. Castro at the expense of shareholders.
"In addition, we have communicated directly to the Board our request that they undertake:
- The appointment of a Chair acceptable to a broader spectrum of the shareholder base.
- A formal search for a new CEO.
"We repeat again our assertion that Mr. Fernandez has usurped the role of CEO. It is exceedingly rare for a non-executive chair to spend every day on-site interacting with members of management. If it walks like a duck and quacks like a duck, it is most likely a duck. This particular duck has not been through any standard CEO vetting process, has no relevant operating or hotel experience, and does not have the faith or confidence of at least 29.5 percent of the shareholder base.
"To put it bluntly: The process of reconciling the interests of HNA and the non-HNA shareholders cannot begin until the corporate governance problem at NH Hotel is solved."
How this soap opera ends is still anyone's guess.