Lemon Tree Hotels' Audacious Plan
Image: Amit Verma
atu Keswani likes to talk about Howard Hughes, the late American billionaire businessman, maverick moviemaker and aviator. Hughes was 18 when his father died and left him a fortune of about a million dollars. It took him over 10 years to double that. “But after that, he doubled his wealth almost every year. How did he do that? He built scale,” says Keswani, the founder, and chairman and managing director of Lemon Tree Hotels.
Keswani adds, without blinking an eyelid, “I’m also going to do the same.”
That might sound outlandish. But Keswani’s Lemon Tree is already the fourth largest hospitality company in India in terms of owned rooms. The first three are marquee names of the industry—Taj Hotels, ITC and Oberoi Hotels. Lemon Tree has close to 2,000 rooms at its 18 hotels, built over the last 10 years. Now Keswani wants to add an equal number in the next two years. In a slightly longer timeline, he wants to have an inventory of 8,000 owned rooms by 2015. No one in the domestic industry has built hotels at such a scorching pace.
But being unconventional is the norm for someone who’s been often called a rebel. After all, not everyone leaves a top corporate job with a crore-plus salary for the uncertain life of an entrepreneur. Keswani spent 15 years with Taj Hotels and did a stint at consultancy major AT Kearney before setting up Lemon Tree in 2002.
There is another reason behind Keswani’s optimism. This May, one of the world’s largest pension fund managers, the Netherlands-based APG with assets of nearly $400 billion, chose Lemon Tree for its first Indian investment. In a two-part investment, the fund took a 5.6 percent stake in Lemon Tree and set up a joint venture called Fleur Hotels that will own and manage hotels. The stake-buy values Lemon Tree at Rs 3,300 crore, making Keswani’s firm the third most valuable hotel chain in India after Bikki Oberoi’s EIH and Tata group’s Indian Hotels under which Taj Hotels operate. The joint venture with APG, with a capital outlay of Rs 2,250 crore to set up 35 hotels, gives Keswani enough ammunition to pull off his ambitious plans. Lemon Tree will hold 53 percent stake in the venture.
Remarkably, the “fox”, as Keswani is known since his Taj days, is not done yet. In May itself, Keswani managed to convince hotel industry veteran Rattan Keswani (not related) to leave the Oberoi group after a three-decade innings. The two formed a joint venture, headed by Rattan Keswani, to manage hotels. It is a bold move for Keswani who’s Lemon Tree has only owned hotels. Lemon Tree will be the bigger shareholder in this venture too. The buzz inside Lemon Tree is about having nearly 2,000 “managed rooms” by 2015. This will take Keswani’s overall room count close to 10,000, and within sniffing distance of Indian Hotels.
BILLION DOLLAR DREAMS
Many peers have praised the APG deal, but few are surprised. “Given the challenges in the sector, he has got a great valuation. Patu’s first deal in 2006 with Warburg Pincus was also a great achievement, especially since Lemon Tree at the time had just taken off,” says Sanjay Sethi, another former Taj employee who turned entrepreneur by setting up Keys Hotels. The Warburg investment valued Lemon Tree at Rs 800 crore when the company had fewer than 200 rooms. “The mid-market segment was underserviced. Patu was bringing in both execution capability and also focussed on running a hotel that was high on service,” says Niten Malhan, managing director, Warburg Pincus. In two years, the company’s value soared to Rs 2,200 crore when Shinsei Bank and Kotak Realty Funds invested. In fact, company insiders point out that if not for the current economic environment, Keswani wouldn’t have agreed for anything less than a Rs 4,000-crore valuation from APG.
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