What De Vere did next

De Vere is about to be taken over. Until recently, this was simply the oldest rumour in the UK hotel industry. But myth will soon become reality, following the knockout 875p-a-share bid delivered earlier this month by property magnate Richard Balfour-Lynn and his investment vehicle AHG Venice, backed by the Bank of Scotland.

The recommended offer was the culmination of a phoney bidding war between AHG and Permira, the private equity group, which had been threatening to trump Balfour-Lynn's initial bid of 825p and even remained in the running after he had upped the stakes to 850p. It marked the end of a process kick-started in March when Spanish hotel operator NH Hoteles made an unsolicited approach for De Vere.

AHG's final offer values De Vere at a hefty £767.4m - or £1.1b including debt, pension liabilities and costs - prompting some observers to argue that it has paid too much. But the suggestion is firmly rejected by Balfour-Lynn, who says: "We run our business on very logical grounds. We don't overpay. We do understand the value of real estate - we were able to analyse it and we're very happy with what we've paid."

So what makes De Vere so valuable to Balfour-Lynn, enabling him to justify a price that would probably have been out of the reach of a purely financial buyer?

Part of the answer lies in AHG's other assets - such as the 29-strong Initial Style conference centre business, bought for £325m from Rentokil last December and now rebranded as Verve Venues. De Vere is also a heavyweight in the conference market, and indeed was one of AHG's leading rivals in the race to buy Initial Style.

"It's a good fit," comments Mark Wynne Smith, chief executive of property adviser Jones Lang LaSalle Hotels Europe division. "There will be some good cost savings." Balfour-Lynn himself says: "We're looking at the synergies between De Vere and Verve. There are substantial synergies to be achieved both ways."

Part of the plan for the Verve portfolio is to move it away from being purely a conference centre business and operate it more like a hotel chain. De Vere's systems, expertise and client base should help it do that.

Weekend occupancy "De Vere has fantastic reservations and distribution channels, particularly for the leisure market," says Balfour-Lynn. He intends to use these to improve weekend occupancy from its current 29% to 50% over two years. Some Verve properties, particularly those with big leisure and golf facilities, could even be converted into De Vere hotels, provided the necessary change-of-use permissions can be obtained.

Synergies aside, Balfour-Lynn also sees great inherent possibilities in De Vere's two main brands - the 19-strong upscale De Vere chain and the 16-strong midmarket Village Hotels. "They're both very flexible brands that we think have potential," he says. "And it's where the market is - corporate business in the week and leisure business at the weekend. They're both seven-day-a-week businesses, which we think is very exciting."

Industry observers say the De Vere-branded properties are in good condition and have generally been well maintained, but some refurbishment will take place. "There's some upgrading to be done at one or two of the city-centre hotels," reveals Balfour-Lynn. "Brighton and Bournemouth could do with some work."

He describes Village as "one of the jewels in the crown" of the group. He says: "During the week, it's got conference business and corporate travel, and at weekends it's got leisure breaks, built around health and fitness and the food offering."

The long-term target is 40-50 UK hotels, adding about five a year at a cost of £20m-£25m each. But analysts point out that while 40-50 is realistic, the rate of rollout will be dictated by the group's ability to find the right sites at the right price.

Another key factor in the deal was the fact that De Vere owned most of its properties. "We like owning the underlying real estate and deriving operating income from it," says Balfour-Lynn. It's the same approach he has taken with the Malmaison and Hotel du Vin chains, which he controls as chief executive of parent company Marylebone Warwick Balfour. These will remain a completely separate business, however.

What he does plan to do is to split De Vere into two companies - one to own the property assets and another to operate the hotels. "By charging the operating company a proper rent, you're able to analyse the hotels objectively against their competitor sets," he explains.

But this preference for property owning could spell the end of De Vere's 15-strong Greens chain of standalone health clubs, which are in leasehold properties and likely to be sold off.

Further uncertainties
Further uncertainties surround the current De Vere management team, headed by Carl Leaver. But AHG does not have its own team in place to take over, and Balfour-Lynn insists: "At this point in time, we have no plans to replace the management."

Of course, with the deal not due to be finalised until the end of August, it's still early days, and Balfour-Lynn insists he remains flexible. "As we spend more time involved in the business, we'll listen to what the management plans are," he says. "Our thinking will be influenced by listening."

Key dates

• March 2004: Shareholder GPG Holdings offers £118m to buy 25% of De Vere shares.
• June 2004: De Vere withdraws its bid for 132 Premier Lodge hotels. GPG's raised bid of £122m lapses.
• February 2005: Sale-and-manageback of De Vere Belfry to leisure group Quinn for £186m.
• March 2006: De Vere Grand in Jersey sold for £15.5m to Fund of Delancey. De Vere reveals that it has received a preliminary approach that may lead to an offer.
• June 2006: AHG wins bidding war against Permira for De Vere.