Brexit may be the panacea to Kwek's M&C headache

THE abrupt departure in September of Millennium & Copthorne Hotels' (M&C) group chief executive Jennifer Fox, just slightly over three months after her appointment, has once again put the spotlight on M&C chairman Kwek Leng Beng's problem with retaining CEOs at the group.

Since the group was floated on the London Stock Exchange (LSE) about 22 years ago, there have been about 10 changes in full-time and interim CEOs.

Ms Fox's departure has been attributed, among other things in the British media, to a "personality clash" and "power struggle" with Mr Kwek. Following her exit, a couple of independent, non-executive directors at M&C have also left.

This episode has been seen in London as once again highlighting corporate governance issues and the level of control exercised by Mr Kwek.

While the corporate governance statement in M&C's 2017 annual report lists one of the CEO's duties as having to "act on the feedback of the chairman", Mr Kwek's approach in wanting to have a strong hand in guiding the running and business strategies of M&C may not sit well with corporate circles in London.

To be fair, Mr Kwek may well have the best interests of M&C shareholders at heart - not just that of his family-controlled, Singapore-listed City Developments Ltd (CDL), which owns 65.2 per cent of M&C, but also minority shareholders.

Due to historical reasons, M&C's model is that of being both an owner and operator of hotels, which is an asset-heavy strategy. This contrasts with the asset-light strategy adopted by the big global hotel chains such as InterContinental Hotels Group, Accor and Marriott International which focus predominantly on hotel management contracts.

Being asset heavy makes it more difficult for M&C to expand (its portfolio stood at 137 hotels as at Sept 30) and fight with the big boys which manage thousands of hotels because they are asset light and can expand faster.

They have the scale of operations and cost advantages in all respects. Online travel agents or OTAs, for instance, charge the big boys lower commissions as they can draw on a bigger portfolio of rooms.

Nimble, entrepreneurial

To withstand competition from these larger rivals as well as the disruptions that have beset the traditional hospitality market - M&C needs to be nimble and more entrepreneurial.

It is natural for Mr Kwek, who has more than four decades' experience in property, finance and hotels, to have his say in running M&C. However, some of his fellow board members may be more concerned with issues such as corporate governance and compliance with rules and regulations in London.

To resolve his perennial problem of having friction with his CEOs, should Mr Kwek take on the role of M&C's executive chairman and do away with the need to have a separate CEO? Even if this is allowed for a London-listed entity, it is likely to be frowned upon from a corporate governance viewpoint.

This aside, the 77-year-old Mr Kwek may not even want to become executive chairman as he may not have enough time to devote to M&C - given his existing commitments.

Alternatively, Mr Kwek could team up with a hospitality talent scout and a human resource maestro to develop a more structured HR framework to find, train and retain talent at all levels of the organisation from the boardroom to the front desk.

There is a bigger question one might ask, given Mr Kwek's challenges in working with CEOs and independent directors of M&C: Why did he list the group in London in the first place? The April 1996 flotation involved 23 hotels in London, New York, Paris and regional centres in Britain, France and Germany that had been owned by Hongkong-listed CDL Hotels International, which in turn was a 51 per cent subsidiary of CDL.

At the time, CDL Hotels International was not trading well on the Hong Kong bourse and it was thought that the hotel business would command a stronger investor following in London, given that it already had a portfolio of hotels there.

M&C's flotation, which was through a private placement, drew nearly seven times the number of shares offered. At its debut on the LSE, the counter opened 16 per cent above the issue price.

In 1999, M&C bought all 43 Asia-Pacific hotels from its then parent CDL Hotels International, and later snapped up the Seoul Hilton and YS Lo's Regal chain in the United States all in the same year. Along with other acquisitions and some management contracts, M&C has built up its portfolio to what it is today.

Boardroom issues may have weighed on Mr Kwek in his decision last year to seek to privatise M&C. He may also have felt that the group has enough resources and support from bankers, should it need to expand. A listing status is, therefore, not necessary for fund-raising.

January setback

Alas, CDL's attempt to take full control of M&C ended unsuccessfully in January. Some minority shareholders blocked the deal - despite CDL sweetening the final offer price to 620 pence per share and undertaking not to sell or redevelop any of its London or New York hotels for at least three years, in an attempt to allay concerns among minority shareholders that CDL was trying to privatise M&C cheaply and then unlock value from some of its properties.

Had Mr Kwek been successful in taking full control of M&C, he could have transferred its corporate headquarters to Singapore and run it in a more entrepreneurial fashion instead of being beset with compliance and other issues that it faces in London.

Will he come back with another offer for M&C? The macro-economic situation in Britain has since worsened and interest rates are on the rise. Sentiment in the London housing market has deteriorated, which will reduce the likelihood of Mr Kwek redeveloping his hotels into residences for sale.

Should there be another offer, will the minority shareholders come around to Mr Kwek's argument that M&C should be valued on its earnings and not its real estate?

From a high of 625.50 pence last November, M&C shares have eased to 470 pence on Monday.

With minority shareholders cognizant of the bleaker post-Brexit economic environment facing Britain today, perhaps if Mr Kwek were to sweeten his offer further and give a longer moratorium on sale/redevelopment of the London and New York properties, he might succeed in privatising M&C this time.