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First with Financial Comment from Arabia

KHI investors should accept a gift from silly Prince Alwaleed

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Prince Alwaleed’s holding company has made an offer to buy out the shares in Kingdom Hotel Investments that it does not own, and investors would be wise to seize this generosity.

Most hotel groups all around the world presently have assets up for sale. In Dubai Union Properties has publicly stated that it is in negotiations to sell its Ritz-Carlton in the Dubai International Financial Centre even before it is finished. Prince Alwaleed himself has been trying to sell The Savoy in London.

Hotel doldrums

So why would Prince Alwaleed want to buy shares in KHI when hotels are a hard sell all over the world? Basically the owners just cannot get the prices that they want because their business models do not justify such prices in a recession.

It is true that the KHI listing on the Nasdaq Dubai has been a disaster and dogged by poor liquidity from Day One, but then there is a cross listing in London.

But yesterday’s $5 a share offer for the outstanding 44 per cent of KHI offers a 25 per cent premium to the current share price. That values the group at $843 million against yesterday’s full-year earnings reported at $22 million, up 27 per cent on 2008.

KHI has its assets spread across emerging markets including Africa, and the prince clearly believes that the stock market is undervaluing the future potential gain in these countries.

But then again you can hardly argue that emerging markets are undervalued from an equity perspective at the moment. Most have almost doubled since the lows of last March and have strongly outperformed the industrialized world. The downside risk from here is obvious.

Cashing out

So the choice for investors is simple: do you cash out of a disappointing stock at a high point in the cycle with a 25 per cent buy-out premium, or wait for the next market downswing to wipe you out?

Admittedly Prince Alwaleed is thinking longer term but his optimism about emerging markets may well prove unfounded. China in particular is an economic powder keg about to explode, and downturns in emerging markets dependent on China, like Africa, will be particularly vicious.

Foreign investors in Africa have not had much success since the end of the British Empire and turning a quick profit is the only sensible thing to do in such unstable countries.

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Written by Peter Cooper

March 16, 2010 at 9:56 am

Posted in China, Hotels, Saudi Arabia

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