By Fiona Rotherham
|
Monday 1st April 2002 |
Text too small? |
As all long-term Brierley Investments shareholders must know by now, the company has a largely lamentable investment history. And you can almost hear the groans of initial disbelief at the latest news from the renamed company, BIL International. It seems BIL, now based in Singapore but still listed on the New Zealand Stock Exchange, has bought the long-closed Kaluakoi hotel in Hawaii, the 1600ha neighbour to BIL's existing - and big-time loss-making - 21,500ha Molokai Ranch resort complex. Both are situated on the island of Molokai, smack between the better-known islands of Maui and Oahu.
On the surface, the deal looks really dumb. Molokai Ranch has caused BIL headaches for years. The resort has racked up losses in each of the last five years, the company had to knock a whopping $US89 million off book value in 2000, and there's been a lack of capital for investment. There was a dearth of buyers when BIL wanted to get out, and there have been other problems like dropping tourist numbers to the island, particularly after September 11, and local vandalism.
BIL's solution: buy more of the same. True, Kaluakoi was cheap. In a recent article, The Honolulu Advertiser quoted state records saying BIL paid $US9.1 million, although Molokai Ranch president Scott Whiting denies this, saying the amount is confidential. Japanese former owner Kukui paid $US35 million for the property in 1987 but ran into difficulties when tourism numbers dropped in the 1990s. Prior to purchase, BIL and Kukui were negotiating a joint venture, but this fell through last year.
Despite the sun, sand and sea, Kaluakoi is not a pretty sight. Marked with long-dead coconut trees, the beachfront property has been on the market for two years. The hotel's 138 rooms and its 18-hole golf course have fallen into disrepair since the previous owner shut down operations and laid off 100 employees more than a year ago. BIL's Molokai Ranch will have to spend several million dollars upgrading Kaluakoi's water and sewerage systems to meet state Health Department regulations - and stop paying the fines being imposed for non-compliance. It has no immediate plans to re-open the golf course or hotel.
Whiting justifies the purchase by saying the neighbouring property was a turn-off to Molokai's visitors. "When you have a failed and closed resort sitting next to your real estate, it drives values down."
BIL is pinning its hopes on attracting investors to help revitalise or possibly buy parts of the 24-year-old Kaluakoi resort, or jointly develop it and Molokai. Whiting says there have already been a few enquiries from investors since they learnt about the ownership change.
But it is a high-risk strategy. For a start, over the past couple of years BIL has failed to attract investment partners to develop Molokai. A deal to sell some of its assets to a US development partner collapsed last August. BIL, which reported a $US119.6 million loss in the last financial year, has indicated that further Hawaiian development will have to be funded by outside investors. "That has not changed," Whiting says.
Then there are overall visitor numbers to Molokai. Hawaiian journalist Andrew Gomes says the numbers of tourists saying "aloha" to Hawaii (meaning "hello" and "goodbye") have fallen from about 100,000 in 1990 to around 56,000 in October last year.
So, has BIL thrown good money after bad? Predictably, Whiting says no: "This is a value adder." He reckons you just can't buy that sort of beachfront property in Hawaii any more. Well, BIL just did and no one else seemed to want it.
BIL bought into the Molokai Ranch in the late 1980s - paying around $US40 million for a 100% share. It has been a problematic investment from the start; chief executive Greg Terry has been quoted saying BIL paid too much. In 1999 former chairman Sir Selwyn Cushing described it as "our most challenging and perplexing investment given, on the one hand, the huge development potential … and, on the other, the extremely long time horizons involved before value may be realised."
Islanders call Molokai the most Hawaiian island. There are no cinemas, traffic lights or shopping malls and no building taller than a palm tree. And residents like it that way. Many have opposed the ranch's development plans.
When BIL first bought Molokai, a cattle ranch covering a third of the island, it had virtually no zoning in place to allow for development, and water rights were a key issue. BIL introduced a 20-year master plan to convert operations to eco-tourism and residential development. But the locals weren't happy. In 1996 vandals laid waste to 8km of Molokai Ranch's water lines and a ranch-owned beach house was burned, according to an Advertiser story at the time. Poachers later cut fences and shot at game animals in the ranch's conservation park. The local community was split when the ranch - as part of a $20 million-plus redevelopment of Maunaloa village - razed old plantation homes and built new homes with higher rents. Picketing residents accused the ranch of heavy-handed tactics. Today the population of Maunaloa is down to 230, and the rows of empty lots where luxury homes were to be built tell the story of a struggling economy, according to the local paper. However, BIL got the water rights it needed for Molokai in 1999, built a $US14 million lodge and now also operates three tourist campsites.
Over the years a lot of BIL management time has been spent attempting to make a buck from its Hawaiian asset - or trying to flog it off. Its book value in BIL's accounts has gone from $US187 million in 1995 to a high of $US265 million in 1997, then $US170 million in early 2000 following an independent valuation (the most recent) that put its worth at between $US170 million and $US220 million.
Capital depreciation is only one aspect. Molokai has also been a cash drain on BIL year after year. The 2001 annual report's segmented accounts show resort property, including Molokai and BIL's Denarau resort in Fiji, made a combined $US5.6 million loss, compared with a $US13.1 million loss the year before. In 1999 Molokai alone lost $US9.4 million, following a $US9 million loss the previous year. In 1996 it was in the red to the tune of $US4.9 million, and $US4.8 million the year before.
So, has the tropical sun simply gone to BIL executives' heads? Wait, there may be some method in their madness. Kaluakoi gives BIL a far longer beachfront than it had before. Whiting also says a lot of community opposition has been quelled by two factors: islanders want more jobs, and Molokai Ranch management has so far not broken its promise to stick to non-intrusive development. Recently Molokai won Maui County Council approval for a community plan for the island. Although that is just one step in the process, a fair chunk of the Kaluakoi property is already zoned for hotel and multi-family development. The ranch will be able to develop the area without seeking a community plan amendment or filing an environmental impact statement. It just needs to protect historic archaeological sites. On Molokai Ranch, BIL has planning entitlements for developing only industrial, residential and some commercial property, not a hotel.
Another potential upside is in BIL bringing in the Sheraton's marketing and management muscle to Molokai in a bid to reverse the tourist decline. Sheraton already runs BIL's Fijian tourism operations and it used to manage Kaluakoi until the Japanese bought in. The management agreement rebrands the Molokai Ranch lodge and beach camp as Sheraton, and the international operator now runs most of the ranch's recreational activities. As a result, Whiting says, Molokai's occupancy rate has already lifted to just under 50% and he's confident it will go higher. It needs to, or BIL may say aloha to Molokai.
Fiona Rotherham
fiona@unlimited.net.nz
No comments yet
Bridging the risk gap
Forecast 2002
Crafting a stable business
Opening the kimono
Pride of the South
Small shareholders fed crumbs
Clipping the ticket
© Copyright 1997-2024 MoneyOnline Ltd - All Rights Reserved
See IRG research reports
