Hands loses Midas touch as £2bn hotels deal hits trouble

Pressure is mounting on Guy Hands to renegotiate the £1.25bn sale and leaseback of Nomura's Le Meridien luxury hotels chain amid signs the Japanese bank's purchase of the business is running into serious trouble.

According to insiders at Meridien, which includes the Waldorf and Grosvenor House hotels in London and the Etoile in Paris, occupancy and room rates have fallen dramatically, placing a question mark over whether the chain will make any profits this year.

Meanwhile Nomura's £850m "art and tech" revamp of the chain, which involves restyling thousands of rooms with plasma televisions and electronically controlled orthopaedic beds, has gone down badly overseas, forcing Nomura to scale back the ambitious makeover.

A number of hotels managed by Meridien in the Far East and Middle East have pulled out of the group altogether after the owners balked at the amounts Nomura wants spent on the revamp and the loss of the chain's personalised French style.

Insiders also say Air France, which guarantees 300,000 room bookings a year with Meridien under a partnership deal which dates back to the days when the French airline owned the hotel chain, is re-examining the arrangement.

The mounting problems at Meridien call into question whether Mr Hands, the head of Nomura's Principal Finance Group and one of the City's best-known financiers, has lost his Midas touch. Mr Hands, who is estimated to have earned £150m over the past five years by taking Nomura into everything from pubs and television rentals to Ministry of Defence married quarters, is in the process of leaving the bank and setting up his own fund. But he will retain the management contract for Meridien.

In addition to the unrest among hotel owners, there has been a mass exodus of senior staff since the German hotelier Jurgen Bertels was brought in as chief executive of Meridien following Nomura's £1.9bn acquisition of the business from Compass Group in May.

The president of Meridien, Bernard Lambert, who has worked for the business for 25 years, is expected to leave next week along with the finance director, Simon Fraser, and the heads of Meridien's North American and Middle East divisions, Fabio Piccarillo and Michel Noblet. Five other senior directors have already quit or been removed by Mr Bertels, who was chief executive of the Starwood chain before joining Meridien.

Mr Hands negotiated the £1.25bn sale and leaseback of Meridien's UK hotels with Royal Bank of Scotland at the same time as concluding the original purchase. Under the terms of the deal Meridien has to pay 25 per cent of its revenues or £50m a year in rent to RBS, whichever is the greater. The downturn in the hotel market following 11 September means Meridien is now paying 35 per cent of its income in rent and, according to some internal forecasts, the chain will be lucky to break even this year after making a profit before interest of £150m last year.

Mr Hands may now be forced to bring forward a similar £1bn sale and leaseback deal on Meridien's European hotels, which include the Ritz in Madrid and the Eden in Rome, to bring the transaction back into profit.

In recent months, Meridien has lost hotel contracts in Singapore, Thailand and Egypt and there are reports more hotels in Dubai are about to pull out. Of the 150 hotels in the group, some 35 are owned, a further 10 are franchised and the remainder are managed on behalf of hotel owners.

So far only 30 rooms at the Russell hotel in London and a handful of rooms in the Grosvenor and Waldorf have been given the "art and tech" treatment and there are reports the hi-tech beds have been scrapped altogether. One insider said: "The strategy seems to be to standardise the rooms when Meridien's reputation has been built on personalising its hotels. Frankly a lot of the owners just aren't buying into the strategy."

The insider also said staff morale had plunged while Meridien's relationship with Air France had been "tarnished" since Nomura took over. "Air France is carefully reviewing the strategy at Meridien because obviously it does not want to see the French flair and style disappear," the source added.

A spokesman for Nomura denied the sale and leaseback deal with Nomura was being renegotiated. "Both sides are quite happy with it," he said.

He added that although occupancy levels across the group had fallen 22 per cent between 11 September and the end of November, they were now back at the levels of a year ago. Nomura also said rates for the 30 rooms given the "art and tech" makeover at the Russell had risen from £78 to £174 and they were full every night. Meridien had also just given the go-ahead for the conversion of 120 rooms at the Cumberland hotel near Marble Arch, London.

Nomura said the sale and leaseback deal in Europe remained part of the plan but it was unlikely to happen before the second half of next year at the earliest.