Beginning of the end of Sun King's empire

SOL Kerzner’s extravagant dreams, for so long South Africa’s brashest export to the world, have finally brought the hotelier low.

His once seemingly invincible company Kerzner International is in debt up to its eyeballs. A lastminute payment restructuring deal reached in frantic negotiations with a junior creditor after a first repayment date was missed has been cancelled because other, bigger creditors fear it will jeopardise their own interests.

As part of the deal he agreed to sell some of his choicest assets, including his flagship Atlantis resort in the Bahamas, which the company would continue to manage and operate.

The company owes $2.5-billion and, according to the Wall Street Journal, several whopping$400-million payments will fall due over the next couple of years.

Where the money will come from is an intriguing question with hotel occupancy rates down and the global debt crisis continuing for the foreseeable future to put the squeeze on travel and tourism. Analysts have warned that luxury travel to global destinations, including Cape Town and Dubai, where he has significant exposure, remains below expectation.

It is hard to see that any of his operations can be profitable any time soon, although the company, quick to court publicity when the going is good, refuses to comment about this or anything else — a sure sign of the trouble it is in.

Kerzner has stepped down as CEO but will stay on as chairman.

Analysts believe this is the beginning of the end of the empire he has spent 40 years building.

“When a company has to start selling assets to try and meet its debts it’s one way, one asset after the next,” said an analyst.

“If he’s had to sell three it’s not long before the rest go. He’s just going to pay more and more fees to try and bail himself out of a deepening hole.”

The Sun King’s light is being eclipsed, and how quickly it has all happened. In 2009 Kerzner said his company was well financed and did not have any debt problems.

In February 2011 the Wall Street Journal reported that he had appointed advisers to restructure 3-billion of debt, $2.6-billion of which was due in September of that year. By May there were rumours that he was looking for a buyer for his One&Only hotels to deal with a mountain of debt.

Five short years previously Kerzner was more gung ho about the company’s future than ever.

So much so that his son Butch, then CEO, announced that it had been decided to take the company private “to keep things interesting”.

The family’s stake had shrunk from 25% in 1993 to 11% as it grew and issued more shares. Kerzner did not consider an 11% stake “strategic”, given his vaulting ambitions.

“We have a lot of confidence in what we’re going to do over the next five to 10 years,” said Butch.

The big stakeholder was the government of Dubai through its investment vehicle Istithmar, whose executive chairman Sultan Ahmed Bin Sulayem was someone who matched the Kerzners’ confidence.

“If anyone thinks bigger than us, he’s the kind of guy that gets it,” said Butch.

Another investor was Goldman Sachs. The Kerzners waxed lyrical about the investment bank’s “enormous fire power” and “global reach” and the way it “deals at the upper echelons of the business and political spheres”.

Also in the Kerzner team was Colony Capital, one of the world’s largest property investors, and private equity investor Providence Capital.

“Bringing these guys in allows us to be more aggressive in terms of international expansion,” Butch announced, the assembled scribes lapping up every word.

The 2006 buyout cost Kerzner’s backers, the guys who “got it”,$3.8-billion, but made the Kerzners a quick $400-million.

When you go private you leverage your balance sheet. Your equity position becomes very small, your debt position very high.

As long as times are good that is fine. Back then times could not have been better. Bankers had lots of money and were practically throwing it at the world’s best- known hotelier.

But the market was at its zenith and by privatising at the top of the market Kerzner was tempting fate. If the good times ended he was going to be in trouble.

Kerzner needed someone with the balls to sound a cautionary note, to tell him that times were as good as they could reasonably be expected to get. That the wave was close to cresting and that the worst time to privatise is at the crest of a wave.

But Kerzner has never been the type to welcome contrary voices. He does not mind an argument as long as he wins. He is a man with “no empathy” who “would have got on well with Napoleon”, according to a former senior executive. You either “got it” or got going.

In 2006 he saw no end to the cycle and he had big plans for his two main brands, Atlantis and One&Only. Atlantis was going to “go global”, announced Butch triumphantly. It was going to suck up the mass market.

The One&Only brand would pander to the six-star market, the ultimate riposte to those who thought the boy from the wrong side of Jo’burg was tacky.

The One & Only hotel at the V&A Waterfront in Cape Town would be one of the most, if not the most, exclusive in the world, promised Kerzner.

“The most expensive hotel per square metre in South Africa,” said Butch.

The rates would be astronomical, but for those who wondered if there would be a market to sustain it he had news. This was only “scratching the surface. All the trends are behind us.”

Others may have wondered if the wave was cresting, but not Kerzner.

“We’re riding that wave,” said Butch.

A hard-boiled, cynical chartered accountant, Kerzner should have known better. Maybe he was taken in by the myth of the invincible “Sun King” that an overwhelmingly sycophantic press (nobody was better at charming the hacks or lavish with freebies, trips to Mauritius, rooms at the Lost City and gifts of champagne delivered to the newsroom) had created around him, and he could continue investing in bigger and bigger projects as people continued getting richer and richer, flocking to his fantastical creations in ever spiralling numbers and spending more and more.

Or maybe he guessed that the wave might end, but so what? It was not his money on the line, so he would ride it for as long as it lasted.

“The debts belong to other people, not to Kerzner,” said someone who spent years researching him. “He’s always used other people’s money and been pretty immune from the volatility. He’s always had funders and they’ve taken the knocks, not him.”

Even now, it’s his creditors’ problem, not his.

“It’s the classic story — if you owe the bank R10 it’s your problem.

If you owe them R10-billion it’s their’s. That’s the way he operates.”

Some say it was hubris that did him in the end, some that it was greed. Whatever it was, in 2006, after going private, Kerzner was on a roll. Even after the death of Butch in a helicopter crash in the Dominican Republic while inspecting sites for another project, Kerzner continued to push forward.

In September 2008, by which time the global economic crisis that would prove his undoing was in full swing, he opened the $1.5-billion, 1500 room, five-star Atlantis hotel on Palm Jumeirah, a man-made, palm-shaped island in Dubai.

He told those who wondered if the £40-million opening party was a bit excessive at a time of growing austerity that “in bad times people need to escape reality”.

In spite of putting some projects on hold and selling assets in the Bahamas and Mexico, escaping reality is what Kerzner seems to be doing. When a group of wealthy Asian and Middle Eastern investors offered $4-billion for Kerzner International last year, the company responded snootily that it was “not for sale”.

The rejection might have had more to do with his ego than a sober calculation of his company’s best interests, said an analyst.

“Knowing Sol he took it as an insult. The psychology is typically to think you can turn things around, but these offers are generally the best way out. It won’t get any easier for him.”

His best hope now, said another market fundi, is some rich Saudi Arabian sheikh, Russian oligarch or sovereign wealth fund which might see the company as a long-term asset they can buy at fire sale price level. Kerzner is presumably hoping that an upswing in the economy will come to his rescue but a World Bank report pointing to global growth of 2.5% suggests it will not happen quickly enough to save even someone with his spectacular record of success from an ultimate reckoning.

“I think he’s saying, ‘Hang on, I’m Sol, this can’t happen to me’,” said one analyst.

“It can. The guys who lent him the money will be under pressure to haul it in. They tighten the screws. Who you are? Your past record means nothing anymore.”

The diminutive Kerzner has always been a swaggerer of note but he can swagger as much as he likes now, said the analyst, his creditors “couldn’t give a damn”.

“He’s going to be trading very close to the margins, watching every penny. And that takes away from him because he can’t expand. He’s got these big ideas but he can’t do that anymore. He’s got to go into care and maintenance, which is just not him.”

At 76 the ride for the man who has been so good at purchasing favours and buying himself out of trouble may have come to an end.