Travelodge will shed one in ten of its 500 UK properties and bid to slash the rent it pays on more than 100 more.
The budget hotel chain is now in the hands of investment bank Goldman Sachs and US hedge funds Golden Tree Asset Management and Avenue Capital following a debt-for-equity swap with former owner Dubai International Capital (DIC).
Travelodge does not own its 500-plus properties – most in the UK and a handful in Ireland and Spain – but hopes to transfer 49 to new owners while KMPG negotiates reductions in rent with landlords of a further 109.
Auditor KPMG will ask creditors to write off £720 million in Travelodge debt despite the company reporting a 20% rise in profit last year to £55 million.
The deal needs the support of at least 75% of Travelodge’s unsecured creditors or the UK’s second-biggest budget chain will go into administration.
DIC will lose £400 million after acquiring Travelodge in a £675 million leveraged buy-out from private equity group Permira in 2005 – a deal which loaded £475 million debt on to the company.
Travelodge has been paying £100 million in annual interest, leaving it unable to refurbish properties despite a 16% year-on-year rise in revenue last year to £370 million.
However, the company still planned to expand.
In January it announced the opening of 41 hotels and revealed its target of running 1,100 properties and 100,000 rooms – up from 37,000 – by mid-decade. There were also plans to open hotels in Spain.
KPMG will handle negotiations with landlords through a company voluntary arrangement (CVA) – an agreement between a firm and its creditors to renegotiate debt and future payments such as leases.
This offers an alternative to administration, but requires three out of four unsecured creditors agree to write off some of what they are owed.
The British Property Federation reacted by complaining “some creditors will take a haircut” and called for a review of the CVA rules.
BPF chief executive Liz Pearce said: “Landlords are being asked to play a significant part in rescuing a business and a minority are being asked to take a big hit.
“We are increasingly concerned with a system that creates such winners and losers and allows advisers to dice and slice creditors.”
The deal ends months of uncertainty for Travelodge, which pledged there would be no job losses among its 6,000 staff.
The new owners will inject £75 million in cash – £55 million to refurbish hotels – write off £235 million in debt and re-pay £71 million, leaving Travelodge owing £329 million.
Travelodge chief executive Grant Hearn said the deal would ensure “a long-term, sustainable business”.
KPMG UK head of restructuring Richard Fleming said: “With the support of lenders, shareholders and landlords, the company will be able to reshape its debt and structure to a model more suited to straitened times.”
Brian Green, also a KPMG partner, added: “We are including a ‘claw back’ mechanism for landlords [who] are also being offered the option of lease extensions.”
Landlords of hotels being transferred to new owners will be asked to accept a 45% reduction in rent and others a reduction of 25%.
Travelodge was established in the UK in 1985 by Charles Forte who bought the brand from its US owner. The group was taken over by Granada in 1996 and acquired by Permira in 2003.
The first US Travelodge motel opened in San Diego in 1940.
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