PPHE Hotel : Proposed Related Party Transaction & Notice of EGM

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PPHE Hotel Group Limited - PPH Proposed Related Party Transaction & Notice of EGM Released 14:37 27-Feb-2020

RNS Number : 3924E

PPHE Hotel Group Limited

27 February 2020

27 February 2020

PPHE Hotel Group Limited

('PPHE Hotel Group', the 'Company' or the 'Group')

Proposed Related Party Transaction and Notice of Extraordinary General Meeting

PPHE Hotel Group, the international hospitality real estate group which develops, owns and operates hotels and resorts, announces today that the Company will be holding an Extraordinary General Meeting at 1st floor, Elizabeth House, Les Ruettes Brayes, St Peter Port, Guernsey GY1 1EW at 12 noon on 17 March 2020 (the 'Extraordinary General Meeting'), notice of which is contained in a circular (the 'Circular') which will shortly be available on the Company's website at www.pphe.com.

The resolution to be proposed at the Extraordinary General Meeting seeks approval for the entry into a construction agreement (the 'Construction Agreement') pursuant to which Gear Construction UK Limited ('Gear UK'), will provide services to the Group relating to the design and build of a new hotel to be known as art'otel london hoxton (the 'Related Party Transaction').

Gear UK is classed as a related party of the Group for the purposes of the Listing Rules of the Financial Conduct Authority (the 'Listing Rules'). Accordingly, the entry into the Construction Agreement by the Group constitutes a related party transaction for the purpose of the Listing Rules and requires the approval of the Group's independent shareholders (the 'Independent Shareholders').

Further details of the proposed Related Party Transaction and the resolution which will be put to Independent Shareholders at the Extraordinary General Meeting are set out below and in the Circular.

Terms used but not defined in this announcement shall have the meaning given to them in the Circular.

Backgroundto and reasons for the Related Party Transaction

Group strategy

The Group's business model is focussed on its expertise in both real estate development and hospitality operations, established over the last 30 years. This dual approach gives the Company the flexibility and control to invest in its hospitality operation and manage its assets to create maximum value for all its stakeholders; investors, team members, customers, suppliers and communities.

In the Group's property portfolio, the Group takes a disciplined and yield-focused approach to asset management and identifies opportunities to deploy capital to optimise the value in its existing portfolio, acquire further assets to drive growth and, where appropriate, extract value to fund longer-term sustainable growth.

The Group's collaboration with the Red Sea Group

Many of the hotels within the Group's portfolio have been developed by the Group either as new-build or conversion projects. The Group has a long and successful history of collaborating with the Red Sea Group in relation to such development projects. The Red Sea Group's construction arm, Gear, has been involved in construction projects where it has been engaged by the Group for the design and construction on a 'turn-key' basis of Park Plaza Westminster Bridge London, Park Plaza London Riverbank, Park Plaza London Park Royal and Park Plaza London Waterloo as well as the extension to Park Plaza London Riverbank.

In addition to the construction services provided through the Red Sea Group, Gear has provided project management services to the Group over the years in connection with a number of hotel projects pursuant to historic agreements. Gear has been key to the recent successful refurbishment of almost all of the Group's hotels in the UK and the Netherlands. During the year ended 31 December 2019, the Group paid a total of c.£2.98 million to Gear pursuant to such agreements. Gear has provided services in respect of the art'otel london hoxton project since 2008.

Gear also provides pre-construction and maintenance services to the Group pursuant to a pre-construction and maintenance contract. Pursuant to the Pre-Construction and Maintenance Contract:

· if the Group wishes to embark on a new construction, development or refurbishment project it can choose (but is under no obligation) to instruct Gear to provide preliminary assessment services in connection with such project;

· Gear shall, in relation to each of the Group's sites, provide advice on an ad-hoc consultancy basis as required by the Group in relation to maintenance issues in respect of its existing hotels; and

· all services provided by Gear to the Group under the Pre-Construction and Maintenance Contract are provided on a project by project basis and with a fixed annual retainer of £60,000 (paid in equal monthly instalments).

In addition, the Group expects to agree to sub-lease a small area of office space to a member or affiliate of the Red Sea Group at its County Hall corporate office in the near future. Such sub-lease is expected to expire on 20 July 2021 and the rent payable by the Red Sea Group to the Group will be based on the cost at which the landlord is leasing such space to the Group.

Background to the art'otel london hoxton site and project

In 2008, the Group acquired a 50 per cent. interest in a site in Hoxton, London EC1 with a view to jointly developing with its then partner a new hotel to be operated by the Group under its art'otel brand. art'otel is a lifestyle collection of hotels that fuse exceptional architectural style with art-inspired interiors, located in cosmopolitan centres across Europe. At the brand's core is the art itself. Each hotel displays a collection of original works designed or acquired specifically for each art'otel, rendering each location a unique art gallery in its own right. art'otel has created a niche for itself in the hotel world, differentiating it from traditional hotels. The Hoxton area of London, which has undergone considerable regeneration in recent years is now recognised as a creative area to the north of the City, London's financial district and has long been identified as an ideal location for the art'otel brand.

In the first quarter of 2018, the Group acquired the remaining 50 per cent. interest to take full control of this site. This acquisition has allowed the Company to drive the planning process and maximise its control of the timetable for construction of art'otel london hoxton.

On 1 April 2019, the Group achieved planning consent from Hackney Council for an improved and final development scheme of art'otel london hoxton. The development will consist of the design and build of a new 27 storey building to accommodate 343 hotel rooms and suites, five floors (comprising 4,688 sqm) of office space, a gym, swimming pool and wellness facilities and an art gallery space. The total gross internal area of the scheme is 32,296 sqm to include three levels of basement. Pre-construction work on the site has already commenced and art'otel london hoxton is expected to open in 2023.

The Company believes the art'otel london hoxton project has the potential to deliver attractive risk-adjusted returns for Shareholders whilst providing a positive statement for the expansion of the art'otel brand.

Tender process and selection of Gear

The Company conducted a tender process for the main works to be carried out in relation to the design and build of art'otel london hoxton with a view to appointing a contractor on a turn-key basis. The Independent Directors appointed AECOM, a highly regarded publicly traded premier infrastructure firm delivering design, planning, engineering, consulting and construction management solutions, to assist in this process, supported by Gear, as project manager under the Hoxton Project Management Agreement. AECOM had not performed any other role for the Company in relation to this project and the Independent Directors consider AECOM to be independent in respect of its role in the tender process.

The initial part of this process required AECOM to approach a large number of independent contractors to respond to a pre-qualification questionnaire relating to the project with a view to inviting them to tender for the works. Despite the large number of independent contractors approached, only three independent contractors were prepared to tender for the works, on the basis of a single stage design and build project based on RIBA Stage 3 design information prepared by the Group's design team supported by Gear.

Tenders were received from each of these independent contractors and were reviewed by AECOM. AECOM assisted the Independent Directors with a detailed assessment of these tenders. All three tenders were assessed to be in excess of the Company's expectations and none were in compliance with the technical and commercial requirements set out by the Group. Of the three tenders received only one of the independent contractors provided a lump sum price for the specified works. Of the other two contractors, one provided a lump sum price only for elements of the works and the other was not willing to offer a lump sum price at all, and would only give an indication of likely costs.

Following the initial review of the first round of tenders from the three contractors and in light of the above, Gear was asked to submit a bid in accordance with the tender documents for the design and build of art'otel london hoxton for a lump sum price, which it did.

As a result, there was a further review of all four tenders submitted, to include Gear's tender, by AECOM who reported to the Independent Directors on the merits of all of the tenders received. The three original tenders were deemed not to be at an acceptable level or compliant with the tender requirements and would not have provided an acceptable return for this development on their terms for the Group. The tender received from Gear was the most competitively priced, and was below the estimated costs originally indicated by AECOM and was deemed fully compliant by AECOM. As a result of this process, the Independent Directors decided to contract with Gear to design and build art'otel london hoxton for a lump sum price contract pursuant to the Construction Agreement for the following reasons:

· Gear offered a lump sum price including a design and build risk contingency for the specified works and its price was in line with the Group's expectations and significantly lower than the next lowest like-for-like price offered by the three independent contractors.

· The Company has a successful track record of working with the Red Sea Group on the construction of a number of its London hotels.

Gear UK, the contracting party to the Construction Agreement, is controlled by the Company's Chairman, Eli Papouchado together with his sons. Eli Papouchado is also the founder of the Red Sea Group which controls Euro Plaza, the Company's largest Shareholder. Under the Relationship Agreement entered into between Euro Plaza, Eli Papouchado and the Company, transactions between the Company and Euro Plaza or any of its associates are required to be on arm's length terms.

Given his interests in Gear UK, Eli Papouchado, the Company's Chairman is considered to have a conflict of interest in relation to the Related Party Transaction. Furthermore, given his long-standing relationship with Eli Papouchado, Boris Ivesha, the Company's President and Chief Executive Officer is also considered to have a conflict of interest in relation to the Related Party Transaction. Neither Eli Papouchado nor Boris Ivesha has participated in the Board's decision to enter into the Related Party Transaction.

Accordingly, the Independent Directors, having taken professional advice from independent advisers, AECOM, concluded that the negotiations and conclusion of the Construction Agreement should be progressed on the basis of the tender submitted by Gear. As such, the Independent Directors, with the support of internal and external legal counsel, negotiated the terms of the contract on behalf of the Company on this basis. The Independent Directors have concluded that the Construction Agreement is on arm's length terms and is in the best interests of the Company and its Shareholders as a whole.

Gear is classed as a related party of the Company in accordance with the Listing Rules and the Related Party Transaction will therefore require the approval of the Independent Shareholders. Accordingly, the Construction Agreement will only be entered into following, inter alia, the passing of the Resolution at the Extraordinary General Meeting by Independent Shareholders holding, in aggregate, a simple majority of the votes cast on the Independent Shares. The Construction Agreement will also only be entered into following the Group having arranged financing on terms that are satisfactory to it.

Principal Terms of the Construction Agreement

The Construction Agreement, which will only be entered into following Shareholder approval and on the Group having arranged financing on terms that are satisfactory to it, will be between Gear UK as Contractor and a wholly-owned subsidiary of the Company as Employer.

Under the Construction Agreement Gear UK assumes the responsibility for the design and construction of the main works for the design and build of art'otel london hoxton for a lump sum of £159,522,748 (exclusive of VAT). Of this amount, c.£24.6 million is based on provisional sums, primarily in respect of FF&E and fit out of the hotel which are detailed and set out as provisional sums in the Construction Agreement. This might cause the total amount payable to Gear UK under the Construction Agreement to be greater or less than the Contract Sum, however the Group does not expect the total amount to be materially different.

In addition to the Contract Sum, the Group is entitled to novate existing contracts for this project for ongoing contracted works and services to Gear at cost. The extent of the future costs to be assumed by Gear in respect of such works and services will depend on the timing of such novations, but are provisionally estimated to be up to £6,062,625 (exclusive of VAT) in total. Such future costs will be payable to Gear by the Group in addition to the Contract Sum.

Gear UK will make monthly applications for payments under the Construction Agreement in line with the contract and following construction industry contractual norms. The applications will be valued by AECOM acting as the Employer's agent and providing cost management services, who is appointed by the Employer but has a duty to act fairly in accordance with the terms of the contract. The Employer's Agent will also be responsible for assessing any applications by Gear for extensions of time or additional loss and/or expense under the Construction Agreement.

Upon the Construction Agreement becoming effective, the Hoxton Project Management Agreement dated 21 June 2018 will be terminated.

The Related Party Transaction

Gear UK is controlled by Eli Papouchado together with his sons. Eli Papouchado is interested in 13,760,260 Ordinary Shares (representing approximately 32.4 per cent. of the issued share capital of the Company (excluding treasury shares)). Gear UK is therefore classed as a related party of the Company in accordance with the Listing Rules and entry into the Construction Agreement with Gear UK constitutes a related party transaction for the purposes of the Listing Rules.

Boris Ivesha, the Company's President and Chief Executive Officer, is deemed to be interested in 4,636,974 Ordinary Shares (representing approximately 10.9 per cent. of the issued share capital of the Company excluding treasury shares) held by Walford.

Euro Plaza, Walford, Eli Papouchado, Boris Ivesha and other parties are a party to a shareholders' agreement dated 14 March 2013 as amended from time to time. Pursuant to the Shareholders' Agreement, it has been agreed that for so long as, inter alia, the combined interests of the Ivesha Parties and the Red Sea Parties in the Company are not less than 30 per cent. and the Red Sea Parties' interest in the Company is at least 20 per cent. of the share capital then in issue (excluding, in both cases, shares held in treasury), on any shareholder resolution, all Ordinary Shares held by the Ivesha Parties shall be voted in a manner which is consistent with the votes cast by, or on behalf of, the Red Sea Parties in respect of that resolution.

As a result, the Ivesha Parties are all considered to be interested in the Ordinary Shares in which the Red Sea Parties are interested and Walford is treated as an Associate of Euro Plaza for the purposes of the related party transaction rules of Listing Rules.

The Listing Rules require that a related party transaction of a listed company must be approved by its shareholders other than the related party and its Associates, unless certain exemptions apply. Since none of the exemptions are applicable in relation to the Related Party Transaction, the Related Party Transaction is subject to, inter alia, the passing of the Resolution, which will be proposed as an ordinary resolution and will require the approval of a simple majority of the votes cast by the Independent Shareholders voting on the Resolution.

Euro Plaza (together with the other companies which hold Ordinary Shares in which Eli Papouchado is interested) and Walford have undertaken not to vote the Ordinary Shares in which they are interested in respect of the Resolution and to take all reasonable steps to ensure that their respective Associates will also abstain from voting on the Resolution.

Financing arrangements

It is intended that the construction and other costs associated with the development and opening of art'otel london hoxton will be funded with acceptable construction funding. The Construction Agreement will only be entered into following the Group having arranged such financing on terms that are satisfactory to it.

The Group is in discussions with funders for construction funding and the basis for the funders' in principle approval of the financing is the lump sum agreed for the construction.

The Company expects to enter into the funding arrangements shortly after the approval of the Related Party Transaction by the Independent Shareholders and will make a further announcement in due course confirming that this has occurred and that the Construction Agreement has been entered into.

The Extraordinary General Meeting

The Circular containing a notice convening the Extraordinary General Meeting, will be posted to shareholders and a copy made available on the Company's website later today. The Resolution is to be proposed as an ordinary resolution, requiring a simple majority of the Independent Shareholders present in person or by proxy to vote in favour in order for it to be passed.

ENDS

Enquiries:

PPHE Hotel Group Limited
Daniel Kos, Chief Financial Officer & Executive Director
Inbar Zilberman, Chief Corporate & Legal Officer	Tel: [phone]
Lisa Woodman, Director of Corporate Communications	Tel: [phone]
Hudson Sandler
Wendy Baker/ Lucy Wollam	Tel: [phone]

Notes to Editors

PPHE Hotel Group is an international hospitality real estate company, with a £1.7 billion portfolio (valued as at summer of 2019) by Savills and Zagreb nekretnine Ltd of primarily prime freehold and long leasehold assets in Europe.

Through its subsidiaries, jointly controlled entities and associates it owns, co-owns, develops, leases, operates and franchises hospitality real estate. Its primary focus is full-service upscale, upper upscale and lifestyle hotels in major gateway cities and regional centres, as well as hotel, resort and campsite properties in select resort destinations.

PPHE Hotel Group benefits from having an exclusive and perpetual licence from the Radisson Hotel Group, one of the world's largest hotel groups, to develop and operate Park Plaza® branded hotels and resorts in Europe, the Middle East and Africa. In addition, PPHE Hotel Group wholly owns, and operates under, the art'otel® brand and its Croatian subsidiary owns, and operates under, the Arena Hotels & Apartments® and Arena Campsites® brands.

PPHE Hotel Group is one of the largest owner operators of hotels in central London and its property portfolio comprises of 37 hotels and resorts in operation, offering a total of approximately 8,800 rooms and eight campsites, offering approximately 6,000 units. PPHE Hotel Group's development pipeline includes new hotels in London and New York City, Belgrade and Zagreb which are expected to add more than 800 rooms to the portfolio by the end of 2023.

PPHE Hotel Group is a Guernsey incorporated company with shares listed on the London Stock Exchange and a constituent of the FTSE 250. PPHE Hotel Group also holds a controlling ownership interest in Arena Hospitality Group, whose shares are listed on the Prime market of the Zagreb Stock Exchange.

Company websites

www.pphe.com
www.arenahospitalitygroup.com

For reservations

www.parkplaza.com
www.artotels.com
www.arenahotels.com
www.arenacampsites.com

This announcement may contain certain 'forward-looking statements' which reflect the Company's and/or the Board's current views with respect to intentions, financial performance, business strategy and future plans, both with respect to the Group and the sectors and industries in which the Group operates. Statements which include the words 'expects', 'intends', 'plans', 'believes', 'projects', 'anticipates', 'will', 'targets', 'aims', 'may', 'would', 'could', 'continue', 'proposed' and similar words, phrases and/or statements are of a future or forward-looking nature. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the Group's actual performance to differ materially from those indicated in these statements. Any forward-looking statements in this announcement reflect the Group's current views with respect to future events and are subject to risks, uncertainties and assumptions relating to the Group's operations, results of operations, growth strategy and potential counterparties. These forward-looking statements speak only as of the date of this announcement. Subject to any legal or regulatory obligations, the Company undertakes no obligation publicly toupdate or review any forward-looking statement, whether as a result of new information, future developments or otherwise. All subsequent written and oral forward-looking statements attributable to the Group or individuals acting on behalf of the Group are expressly qualified in their entirety by this paragraph. Nothing in this announcement should be considered as a profit forecast.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [e-mail] or visit www.rns.com.

END

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