By Dishani Samaraweera
Approaching noon, on an uneventful May day at the Colombo Stock Exchange, brokers were thinking fondly of their lunch, while keeping a lazy eye on the stock tickers scrolling the day’s trades. As the symbols flashed passed one after the other it took a few seconds until the penny dropped – then suddenly there was a mad flurry of phone calls. In the mayhem the founder Chairman of the Confifi Group of Hotels got a phone call – “someone has taken over your company.”
The change of ownership, after 40 years in the hands of the Furkhan family, took less than 15 minutes.
Lanka Orix Leasing Company’s (LOLC) Rs 2.5 billion Confifi takeover in May 2010 was perhaps the clearest indicator of how fast and forcefully this large company could move. One year later, in the deceptively quiet LOLC office in Rajagiriya, LOLC’s Chief Executive and Managing Director, Kapila Jayawardena sums it up. “You wouldn’t think it, but we are very flexible for such a big company. We can decide fast and move fast.” Jayawardena says LOLC was already thinking about dipping into the post war tourism cash pot. “We knew tourism would take off and the signals were very good. But even at the time we started investing in hotels people still had the mindset that hotels were not doing well. After we bought Confifi in May 2010, there was a rush into leisure,” says Jayawardena, who does not go into the details behind the Confifi takeover, one of the biggest market events since Dr Sena Yaddehige took control of the Richard Peiris group from the Peiris family in 2002.
But the story didn’t begin in the LOLC board room. It started with an investment banker and his friends browsing over some annual reports. “We noticed that contrary to general belief, the Furkhans did not have majority ownership of their company. The Furkhans held only 29.9% of the Confifi Group,” says Nishan Sumanadeera the head of Frontier Capital Partners, an investment banking service provider. Following this initial lead Sumanadeera made another interesting discovery. The structure of the holdings of the Confifi Group was such, that acquiring the four star Confifi Hotel Holdings (Club Palm Garden Hotel) and Riverina Hotel, would automatically result in ownership of the five star Eden hotel.
Prepped with these little gems of knowledge, Sumanadeera made some phone calls – to a few of the larger shareholders of Confifi, outside the Furkhan family.
While Confifi Management Services, a company controlled by the Furkhan family, held the single largest chunk of Confifi Hotel Holdings, the balance majority was scattered among different institutional and private investors. The NAMAL Fund held 19%, while individuals held about 23% of the company. The balance was distributed among smaller shareholders. The share ownership structure was similar in the case of Riverina. “We contacted some of the shareholders through intermediaries to check their reaction and all of them indicated they were open to negotiate,” says Sumanadeera. This bit of investigating laid the foundation for an acquisition. The next step was to find an acquirer.
Sumanadeera approached Ishara Nanayakkara, LOLC’s Deputy Executive Chairman. Majority ownership of LOLC had, in 2001, been acquired by the Nanayakkara family of Ishara Traders fame. Ishara Nanayakkara was appointed to the LOLC board in January 2002. LOLC’s original owners at the time of establishment in 1980, were the Orix Corporation of Japan (30%), the International Finance Corporation (15%), the Bank of Ceylon (10%), the National Development Bank (6.7%), the Development Finance Corporation of Ceylon (5%) and a few individuals. At present the Nanayakkara family owns slightly over 52% of LOLC through shareholdings divided among Rajah Nanayakkara (29.76%), his son Ishara Nanayakkara (12.60%) and daughter, Kalsha Amarasinghe (11.03%). Rajah Nanayakkara is a non executive member of the LOLC board, while Kalsha Amarasinghe is an executive director. A 30% chunk of LOLC is still owned by the Orix Corporation of Japan. Originally incorporated as Sri Lanka’s first specialised leasing company in 1980, LOLC had expanded well beyond its leasing beginnings into Sri Lanka’s biggest non bank financial institution. In 2010, LOLC group assets topped Rs111 billion.
Employees, analysts and brokers say that while LOLC was always innovative, the company became more venturesome with Nanayakkara taking over the reins. By the time Jayawardena joined in 2007, the thinking was even bigger and a new corporate strategy had been plugged in - to get LOLC into shape as a heavy weight conglomerate.
Seated in his office in the World Trade Centre, overlooking the Colombo harbour, Sumanadeera recalls his assessment of LOLC’s Deputy Chairman. “He is a risk taker but a calculated risk taker.” Overall, Sumanadeera felt LOLC was ready to add hotels to its collection of businesses. “They were very liquid with the potential to raise large amounts of funds immediately. But although LOLC was emerging as a diversified conglomerate they had still not diversified into tourism. So I felt Confifi would be very attractive to LOLC,” says Sumanadeera.
LOLC’s high liquidity was particularly important in a potential takeover because the acquiring company must not only immediately raise the cash to buy up majority share ownership but must also be ready with the cash to realise its mandatory purchase offer once it hits the 30% ownership ceiling. LOLC was cash rich and had large unrealised capital gains from government bonds, together with a large portfolio of stocks. At end March 2010 LOLC had stashed Rs 7.9 billion in government bonds, while it also held quoted ordinary shares worth Rs 3.6 billion. Its international connections facilitated access to foreign credit.
With Nanayakkara showing interest in Confifi, a takeover plan was quietly hatched in the LOLC board room with the participation of its top management and the blessings of the board. The entire scheme was kept under tight wraps because Nanayakkara wanted 51% of the Confifi Group in one swoop – to ensure an unassailable position of control that could not be challenged by the Furkhans if they were to rally the balance shareholders against the takeover. Once the 51% controlling stake was lined up, LOLC stood by with a court order to be served on Confifi directors immediately following the acquisition, preventing disposal of Riverina and Confifi Hotel Holdings’ assets - including the Eden Hotel.
On the set date the plan unfolded with military precision, and within a few minutes LOLC had control of 490 hotel rooms in the popular tourist location of Beruwala, in the South of Sri Lanka.
Understandably shocked by the speed of events, market sources say the Furkhans had initially threatened legal action but at a meeting with Nanayakkara and LOLC top brass, agreed to sell their stake of Confifi before LOLC issued its mandatory purchase offer. It turns out LOLC had snatched Confifi from under the nose of Sri Lanka’s corporate fat cat John Keells. “By that time we were already in the market and we had come to an understanding with John Keells. But we had not finalised because some of the shareholders did not agree. Then came LOLC,” said M T A Furkhan.
Ishara Nanayakkara was appointed Chairman of the Confifi Group in June 2010 and Ms. Amarasinghe was also appointed a Director of the Confifi Group. LOLC’s Chief Executive Jayawardena, is Chairman of LOLC’s tourism arm, LOLC Leisure. Both M T A Furkhan and his son Stefan Furkhan are still on the board of the Eden Hotel.
Jayawardena says LOLC is consolidating as a diversified conglomerate and the expensive acquisitions last year were part of a tightly targeted strategy to get a slice of the tourism pie before prices went through the roof. “The Rs2.5 billion investment was a bargain,” says Jayawardena.
Still shopping around after bagging Confifi, in September 2010 LOLC paid Rs 310 million and bought out the family owned Jetwing group for 60% controlling interest of Tropical Villas. “Tropical Villas is located behind Riverina and Palm Garden. With it, they have control of that entire stretch of beach, to develop it anyway they want,” says Jetwing Group Chairman Hiran Cooray. An experienced hotelier, controlling one of Sri Lanka’s largest leisure groups, Cooray says LOLCs acquisitions places it among the mid to large hotel operators in the country, at a time when tourism is on the upswing. LOLC has also bought a 28 acre property in the East Coast, near Vanderloos Bay, to build a boutique hotel and is thinking about building a city hotel to tap the business traveller segment.
But in May 2011 LOLC announced that all of its hotels, except for Eden, will be closed for refurbishing. Jayawardena says the decision would add value to the LOLC hotels. “We know hotel management is not our core area of expertise. That is why we are negotiating with international hotel brands to take over management. We will only be the asset owners. The hotels have very strong volume projections for profits and they can raise their own capital in future,” says Jayawardena.
He defends the high entry cost by noting that even in the short while since acquisition, the hotel venture has tested positive. In less than 10 months, the leisure sector contributed Rs 1.4 billion to group revenue in 2010-11 and the profit before tax was Rs 219 million. When the management agreement comes through, says Jayawardena, LOLC will be the only company in Sri Lanka with resort hotels managed by an international brand name.
In October last year LOLC also bought into the post war construction boom with a Rs 1.6 billion stake in the Sierra Group, one of the most diversified engineering construction companies in Sri Lanka. (LOLC and its subsidiary Browns Investment, bought 20% of Sierra Constructions and another 20% of Sierra Holdings). Through Sierra Holdings, LOLC now has a stake in Agstar Fertilizer.
In April this year, LOLC announced that it had reorganised itself into a holding company. But at this point, together with its many acquisitions, LOLC is also left with a massive debt. As at end March 2011 the group was Rs 46 billion in debt, out of which Rs 28 billion was down as long term debt.
Warning bells were ringing earlier this year. In February Fitch Rating downgraded LOLC a notch to A minus, with a negative outlook. Fitch said the downgrade was due to significant debt-funded equity investments in group companies. LOLC’s 2011 annual report says the firm’s investments in the group’s companies, subsidiaries, joint ventures and associate companies increased to Rs 10.3 billion in 2010 with a major share of this investment going into financial services, leisure, construction, renewable energy and agriculture and plantations. Fitch, in February said the debt-funded equity investments in subsidiaries had increased LOLCs double leverage to 166%.
Fitch says LOLC’s rating may drop again if the double leverage does not ease, or if leverage is not reduced to a level that can be comfortably serviced by sustainable cash flows from its investments, and a debt maturity profile and capital structure appropriate for an investment holding company are not achieved. LOLC’s rating is also at risk if the Lanka Orix Finance Company’s (LOFC’s) financial profile deteriorates, because most of LOLC’s other investments (except for the Commercial Leasing Company) are still in the growth stage, or are otherwise limited in their cash distributions to the holding company.
Jayawardena, brushed aside the Fitch downgrade. He says LOLC has already started reorganising its debt profile. “We will raise over Rs1 billion from listed debentures. In addition, we are going to the international market with a bond for US$ 50 million to US$ 100 million this year. After Sri Lanka Telecom, this will be the first time a Sri Lankan corporate went to the international market,” says Jayawardena.
In July, LOLC notified the Stock Exchange that it will issue unsecured listed debentures up to the value of Rs 1 billion, and another unlisted debenture for Rs 500 million, of 4 – 5 years. The issue will be managed by First Capital, while the trustee is the Bank of Ceylon. The funds will be used to retire part of the company’s short term debt, to better align the maturity profile of LOLCs assets and liabilities. This is expected to give LOLCs balance sheet a facelift. “We’ll use the new funds from the bond and the debenture, for two things. First, to repay local debts, which are at a higher rate of interest, and second to reorganise the debt portfolio. At this point credit is cheaper in international markets. We will have about 3% advantage in international borrowing. So we will use this money to repay the more expensive local loans. We will also use the funding to change the debt portfolio. Right now, long and short term debt is 50:50. We want to shift it to 60:40, where long term debt is 60% and short term debt is 40%,” says Jayawardena.
LOLCs Chief Risk Officer, Sharmini Wickremasekera maintains the firm’s risks are calculated and not haphazard. Wickremasekera, one of LOLCs oldest employees, says the company’s risk assessment mechanisms and control structures have got better with time. She notes that even during the 2008-9 financial crisis, when many finance companies were floundering, LOLC barely flinched. It was even able to pay increments and bonuses to employees. “It’s all about maintaining good corporate governance and controls,” says Wickremasekera.
Over the last 31 years, LOLC has moved from a leasing business with about 15 employees into a conglomerate controlling 16 firms and employing over 2,600 people. LOLC’s growth is telling. From Rs218 million post tax profit 10 years ago, in 2002, profits climbed steadily to Rs2.3 billion in 2010. In 2011 profits jumped to Rs7 billion, a 200% growth over the previous best. Jayawardena says the company has been able to reap the peace dividend faster than most. “The writing was on the wall. We knew the war would end and the entire business landscape would change. So a few years ago we started positioning ourselves,” he says. Having identified leisure, construction and renewable energy as new post war pastures, LOLC has been digging itself into these plots, while also pushing up its stake in the familiar turf of agriculture and financial services. The jump in profits this year is mainly due to financial services that tripled its profits to Rs 5.3 billion compared to 2010.
Already, with the North and East gradually moving towards normalcy, demand for agricultural equipment, leasing and micro credit, including Islamic credit, is on the rise, and getting in there before most of the competition, has helped. Lanka Orix Micro Credit’s loan portfolio grew by Rs4.2 billion to Rs 8.2 billion in 2010/11. Credit to the small and medium sector, in the form of loans, hire purchase and finance leases, increased by 120% to Rs 39.8 billion in 2010/11 compared to 2009/10. LOLC’s Mudharabah investment and savings portfolio, that follows Islamic principles, grew to Rs 2.9 billion from Rs 1.8 billion.
While profits from the emerging markets in the North and East may not be sustainable at present levels for much longer, due to intensifying competition, LOLC has skimmed the market for last year. In fact, LOLC seemed to have developed a Midas touch last year. Almost everything it touched turned to gold. Treasury bonds and share trading showered Rs 1.5 billion in capital gains, dividends and interest income, while the market value of quoted shares went from Rs 5.7 billion to Rs 10.7 billion by March 2011. LOLC had also upped its investments in non quoted ordinary shares from Rs 332,457 in 2010 to Rs 290 million in 2011, which are recognised at cost in the balance sheet. This year, LOLC divested its 20% stake in People’s Merchant Bank. But LOLC continues to have toe hold in the banking sector with 20% in Seylan Bank and 15% in HDFC.
In July, the lucrative LOFC, that cleared a profit after tax of Rs 1.2 billion in 2010/11, went public under the Central Bank directive that all registered finance companies should be listed. All new leasing and deposit raising is done by the finance company while LOLC functions as a holding company. The finance company did a 1:14 share split in April 2011, to increase liquidity, and then went for a private placement to divest 10% of its shares at Rs5 per share.
LOLC also sprouted new tentacles. LOLC Securities came on board the stock market trading floor in July. Lanka Orix Insurance Brokers was replaced by a new firm, Lanka Orix Insurance (LOIC), offering general and life insurance in July. Jayawardena says the insurance company will allow LOLC to enter Sri Lanka’s almost untouched life insurance market. “We want to be big in life insurance. At this point life insurance penetration is only about 10.8 %. So we have a huge market and we have the channels already laid out, to tap into it,” says Jayawardena. LOLC’s widespread leasing and SME businesses are expected to push insurance products into the so far untapped grassroots. As Jayawardena puts it, “when they get a three wheeler from us, we will also sell them a life insurance policy, that way both parties gain.” With the North and East adding to its geographical reach, Jayawardena says LOLC’s existing businesses can only expand.
In the sidelines LOLC is planting gliricidia for dendro power generation. Jayawardena says the renewable energy concept is here to stay and the renewable energy market will expand with time. LOLC has already purchased 15 acres in Kalutara and the plan is to generate 30MWs from dendro power units in different parts of the country. While the stem of the gliricidia plant is used for bio energy, the leaves can be used as bio fertilizer. The investment in Agstar Fertilizer will be useful for this purpose.
Jayawardena is confident the holding company structure and debt restructuring plans will pay out dividends in the form of improved ratings before long. He points out that LOLC has not got it wrong up to now and the Nanayakkara-Jayawardena partnership is working well. So who calls the shots? “We take it in turns,” says Jayawardena with only a momentary pause. “Really,” he says laughing for the first time, “Ishara and I are pretty much on the same wave length. Of course we don’t always agree but we take it in turns to disagree,” he says laughing his way out of the tight spot. So what about the rest of the Nanayakkara clan? Do they gang up on you in the board room? “No way”, says Jayawardena “They listen when we have something to say. They are professional about business.”
Pushed into giving his opinion about working for a family owned company, Jayawardena, who has been chief executive for four years, says “a big mistake family owned companies make is being afraid of losing their power. So they don’t normally appoint an outsider as the MD. But so far I have not had any problems working with this family.” Notwithstanding Jayawardena’s defence of the Nanayakkaras, the highest node of executive power at LOLC is at the Deputy Executive Chairman’s seat of Ishara Nanayakkara. The Chairperson, Rohini Nanayakkara, who isn’t related to the controlling Nanayakkara family, is a non-executive official. The Nanayakkaras are not taking any chances and there is no possibility of a hostile takeover of LOLC – unlike Confifi; the Nanayakkaras are majority shareholders and are not prepared to let go of that control.