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Sale and leaseback

There are two principal arguments for selling and leasing back assets, commonly property that a business owns:

1 It frees up cash, to invest in expanding a business or to pay back to shareholders, but some would consider this to be asset stripping.

2 Companies that own property may not use the property efficiently: notional rental charges are set too low - a third party would pay more in rent. However, these arguments could be countered by stating that there is no reason why company-owned property cannot be managed and charged out effectively.

The first argument does seem the strategically stronger one. If you really have a realistic growth plan that requires cash which is not available from elsewhere, releasing cash to expand makes sense.

One derivative of sale and leaseback is an 'asset lite' strategy that is apparently successful in the growing hospitality sector.

Asset light

Asset light is both a financial and operational strategy, the concept being to have a slim or light balance sheet, that is, one with as few assets as possible, particularly tangible fixed assets such as land, buildings and equipment. The effect on operational strategy is to bring more discipline, there being no such thing as a 'free' or cut-price asset.

There are several drivers for such a concept:

1 Little need for funds.

2 Low risks of ownership, for example impairment of assets values.

3 A low number for the amount of capital employed (which will enhance the return percentage).

4 Strategy can focus on operating rather than on both operating and asset/investment management.

The principal argument for making an established entity asset light is the realization of cash to further expand 'core' activities, and this does make sense where the demand for growth of the operations is hampered by the lack of funding. For example, the sale and leaseback of properties will release substantial funds. But this approach can also be abused; while there may be short-term gain from releasing funds tied up in underperforming properties and paying out the cash as dividends, the longer-term potential increase in property values is lost for ever, along with the security that owning the properties gives.

In the example below, we see that Accor is under pressure from some shareholders to become asset light.

Developing mainly through the asset-light strategy

For the year, 57 per cent of openings were under management contracts and 28 per cent under franchise agreements. This was in line with the asset-light strategy, which promotes the use of less capital-intensive operating structures. Accor announced a target for year-end 2016 of having 40 per cent of rooms operated under franchise agreements, 40 per cent under management contracts and 20 per cent owned or leased. This target can be met by a combination of two factors: network development comprised of 80 per cent franchising and management contracts - a goal that was met.

In 2012 there was a stepped-up programme to dispose of owned properties. After their sale, these hotels remain in the Accor network under franchise or management contracts. In this way, Accor can increasingly focus on providing their partners with high value-added hotel services while leveraging the extensive hotel operator skills that constitute their strength and underpin their reputation.

An assertive asset management strategy in 2012

In 2012, the main property disposals were carried out by combining four operating structures:

- The sale and management-back of 10 units, including the Novotel New York, the Pullman Paris Tour Eiffel, the Beijing Sanyuan Novotel/ibis complex and the Sofitel Paris la Defense in 2012 and the Sofitel Paris Le Faubourg in early 2013. In this case, Accor sells the property but continues to manage the hotel through a long-term management contract.

- The sale and franchise-back of 60 hotels, mainly in South Africa and France. In this case, Accor sells the property, which is then operated by a franchisee with its teams, supported by Accor services, systems and brands.

- The sale and variable leaseback of nine hotels, of which two are MGallery units in Germany and the Netherlands. In this case, Accor sells the property, then operates it under a variable lease, with the rents indexed to hotel revenue.

- The outright sale of 20 hotels, mainly including the Pullman Paris Rive Gauche and 5 units in Germany.

(Accor, 2012)

But you will still see the comments that the sale of properties allows a special dividend to be returned to shareholders; however, you have sold the property, if not the silverware. It is hardly a clever strategy. The more difficult issue to address is the apparent inefficient use of currently owned properties. Maybe it is easier for CEOs to solve this problem by selling off the assets and letting market value for rent make the strategic decisions for them? Hopefully you do not pay the CEO too much.

Asset stripping

This is a term not heard so much these days and it is not really a financial strategy, rather the strategy of opportunists who see more value in breaking up a business, possibly keeping units running with leased property and equipment, or simply winding the business up.

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