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November 6, 2006 7:20 pm

Four Seasons

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Bill Gates and Saudi Prince Alwaleed bin Talal would both struggle to blow their wealth on lavish hotel bills. But they may have found another way to make a dent.

Their proposal to take Four Seasons Hotels private values the luxury hotel operator at $3.7bn. That presumably includes an incentive payment of $288m to Isadore Sharp, the chief executive, who will hold on to a 10 per cent stake. It translates into about 40 times 2007 earnings before interest, tax, depreciation and amortisation – well above even what Prince Alwaleed paid earlier in the year to buy Fairmont Hotels.

But while other shareholders might take comfort from the 28 per cent premium to Four Seasons’ average share price over the past three months, the deal should still raise some eyebrows. Mr Sharp gets a bonus effectively for not blocking a deal with himself and has already made it clear he is not prepared to pursue any other proposals. That may remind investors of the potential for conflicts of interest when it comes to management buy-outs.

Admittedly, the company’s standalone valuation appears lower than the bid, in spite of its solid business model, geared towards the luxury segment and managing, rather than owning, hotels. Its brand offers opportunities for further growth through new developments and residential sales. However, having deep-pocketed owners to provide extra funding would probably not alone be enough to justify the price tag.

Instead, the possibility must be that Prince Alwaleed hopes to reap some synergies with his existing hotel investments. If so, other shareholders may not be getting the best possible deal. They only have themselves to blame, given that they willingly invested in a company in effect controlled by Mr Sharp through a dual voting structure.

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