Tourism mourns an industry giant and its own demise

• South Africa
• Hotels, Johannesburg Stock Exchange, JSE, Sol Kerzner, Sun City, Tourism, Tsogo Sun Hotels
• March 23, 2020

It was a landmark week in the tourism industry for all the wrong reasons, topped off by the passing of industry icon and world-famous South African, Sol Kerzner.

It’s worth touching on his legacy before discussing the Tsogo Sun Hotels announcement that came out on Friday after the markets closed.

Kerzner – a life less ordinary.

Kerzner’s colourful life can be read about in the tabloids. I only care about his path as an entrepreneur, which is fascinating.

Kerzner qualified as a Chartered Accountant and helped manage hotels for his father in Durban. He went on to purchase his own hotel in his late 20s, financed by his colleagues at the accounting firm where he worked.

Talk about crowdfunding before it was cool!

His funding partners became a bit fancier from there, as he partnered with South African Breweries Limited to create one of the most iconic resorts in the world – Sun City, developed in 1979 for around R30m. Yes, inflation is quite something to behold, since there are plenty of houses in South Africa that cost more than that today.

Sun City formed the basis of the Southern Sun group in the 1980s before Kerzner sold out of Sun City and the other South African assets in the early ‘90s.

He then expanded internationally into the Bahamas and North America, including opening the One&Only resorts. In 2008, he opened the US$1.5bn Atlantis, The Palm on a man-made island in Dubai, an extraordinary sight to behold if you ever find yourself in Dubai or flying over it.

Honorary knighthood, an appointment made to a citizen of a country where the Queen is not head of state, was bestowed upon Kerzner by the British Queen in 2010. He had been nominated by the Bahamas government as the largest employer in the country.

He passed away this weekend, aged 84. May he rest in peace.

Tsogo Sun – born from the legacy.

In 1983, Kerzner’s Southern Sun Hotels group split into a casino group (Sun International) and a hotel group (Southern Sun). The hotel group was essentially the foundation of the Tsogo Sun group, which went through a period as a subsidiary of South African Breweries before being spun out in an empowerment deal shortly after the 1994 election.

This led to several casino licences being awarded, including the development of Montecasino. SABMiller eventually sold out in 2014 after an impressive run that saw the group open numerous resorts and merge with Gold Reef Resorts Limited.

There was yet more investment banking action to come, as the group split its casino and hotel assets once more, harking back to the 1980s transaction. Tsogo Sun Hotels (JSE:TSO) was unbundled from Tsogo Sun Holdings in 2019. Tsogo Sun Holdings was renamed to Tsogo Sun Gaming (JSE:TSG).

TSO and TSG traded in a slightly downward trend for the rest of 2019 before tanking two-thirds of their value thanks to the Corona crisis.

Even legacies like this are buckling under COVID-19.

Despite such an illustrious history, a crushing black swan like COVID-19 has brought the group to its knees.

Tsogo Sun Hotels released a SENS announcement on Friday after the markets closed, an old trick to soften the blow of bad news.

The travel bans introduced by government to flatten the curve resulted in “forward bookings for April through June reflecting a total collapse of demand” – not what any investor or lender wants to hear.

The group is “deactivating” 36 hotels, representing 7,700 rooms or 40% of group capacity. It’s unclear exactly what this means for staff, but I suspect that staff earning wages rather than fixed salaries will likely be affected.

The alternative is to allow the entire group to fail, so they are doing the right thing from a business perspective. Operating fancy hotels with no guests isn’t cheap or advisable.

Interestingly, the group notes an approach from private and public healthcare services to use deactivated hotels as quarantine facilities. The financial impact of this is unknown, but it would help soften the blow to investors, provided of course that the government pays for this service.

We’ve talked about debt covenants before. These are the promises that a company makes to banks who lend it money. Management thinks they will meet the covenant requirements at end March, but a prolonged period of travel bans will land them in serious trouble for the September 2020 test. They are already engaging with the banks to deal with this.

What did the share price do? 

Surprisingly, not a lot. 

It seems the market had fully priced in a cataclysmic outcome for the company. Either that, or the old trick of releasing bad news outside of trading hours seems to have worked!