MFS battles debt mountainFiona Cameron, Anthony Klan | February...

MFS battles debt mountain

Fiona Cameron, Anthony Klan | February 21, 2008

EMBATTLED Queensland financier MFS Limited has postponed the release of its first-half results as it beds down a $50 million rescue package and attempts to pay down its short-term debt.

MFS was due to report today but will now deliver its results when it completes a "strategic review" of its debt position, which is expected to occur in late March.

As revealed by The Australian, major MFS lender Fortress Investment Group has thrown the company a $50 million lifeline and extended by several months a March deadline to repay $150 million of high-interest debt.

While MFS now looks like a train crash in slow motion, the property players who sold the group its assets at top-of-the-market prices in the past two years appear to be big winners from the imbroglio.

Stockland, Outrigger and Sunland Group are some of the corporate names that booked healthy profits offloading assets atboomtime prices to the voracious MFS.

MFS spent upwards of $3billion -- much of it debt funded -- hoovering up a range of properties and businesses in buoyant conditions.

Although MFS paid top dollar for many of its assets, it seems none of the sellers will admit to an Alan Bond moment.

("You only get one Alan Bond in a lifetime," the late Kerry Packer famously said after selling the Nine Network to Bond for $1billion in the heady 1980s. When Bond Corp collapsed soon after, Packer bought the network back for about $200 million.)

"MFS were regarded as buying at the top of the market," said industry analyst Dean Dransfield, of Dransfield Hotels & Resorts.

But he said the market had re-rated all tourism assets up sharply in the past three years, and MFS had been competing in a "cashed-up market that was prepared to pay full price".

But MFS is now taking a bath on its hurried asset sell-off, highlighted by the sale this month of a majority stake in its Stella division, with analysts saying the deal valued the enterprise at $1.54billion, compared to the $2.3 billion MFS spent acquiring it.

MFS sold 65 per cent of Stella, where most of the group's tourism assets are held, to private equity firm CVC Asia Pacific for $409 million cash and $906million of assumed debt.

MFS's purchase of the Outrigger and Saville chains were regarded in the industry as two of its most overblown deals.

"The pricing on Saville was considered very hot and Stockland booked a significant abnormal profit as a consequence of it," Mr Dransfield said. "The pricing on the Outrigger transaction was also considered very hot."

Matthew Quinn, chief executive of Stockland Group, said his company's decision to sell the corporate traveller-focused Saville Hotel chain to MFS for $114million in December 2006 was not about picking the top of the market. Rather, it was a strategic move for Stockland.

He acknowledges that Stockland made "a good profit" from the transaction, but rejects the suggestion that the deal was overvalued.

A few months after the Saville deal, MFS paid $120 million for the management rights to 1500 Australasian hotel rooms operated by the Hawaiian-based Outrigger Hotels and Resorts.

Those rooms were housed in 13 properties in Australia and New Zealand that Outrigger had accumulated in the previous seven years.

The deal puzzled some, because it seemed to wipe out Outrigger's own Australasian aspirations.

Not so. The beauty for Outrigger in the deal was that it got the $120 million cash, but did not sell its brand name nor did it sign a non-compete clause.

So now Outrigger is cashed up and ready to roar, and has been aggressively rebuilding its Australasian business.

Cliff Olson, Outrigger's vice-president (Oceania), said the price MFS offered "couldn't be refused".

"It was a very good business decision," Mr Olson said.

The James Packer-backed Sunland Group, which posted a record $59.8 million this week, is understood privately to partially attribute much of its current financial health to the big cash injection it got from MFS on the $100 million sale of Sunleisure and Sunkids, deals that were completed last year.

Despite overpaying for many assets, some of MFS's deals have generated a profit, such as the sale of Sydney's Park Hyatt Hotel in December, which brought $201.6 million, $20 million above industry estimates and equating to $1.267 million a room.

And not all those who sold assets to MFS are laughing, such as S8's Chris Scott, who is bleeding as badly as MFS itself, having taken MFS stock in exchange for his S8 stake in MFS's $700million takeover in September 2006.