Chelsfield may sell internet hotels unit

Chelsfield is working on a deal to refinance or sell part of its £400m internet hotels business Global Switch.

The property company, which took full ownership of Global Switch in March by buying out its partner in the venture, sees the current structure of the business' debt as untenable.

At the time of that deal, Elliott Bernerd, Chelsfield's chairman, said: "There can be no ducking the issues arising from Global Switch. The experience has not been easy, either for ourselves or our joint venture partners, TrizecHahn."

Global Switch has £240m debt that was borrowed at the high rates necessary for telecoms enterprises in the boom times of the technology bubble. Internet hotels were once one of the most highly rated sectors, as telecoms companies sought space to house the equipment needed to serve the rapidly growing demand for their services. The "hotels" are warehouses that house internet servers.

The cash crisis in the telecoms sector and the sudden drop in demand for its services has left internet hotels, which are very expensive to build, with massive spare capacity.

Chelsfield is now making progress on talks with banks and potential institutional investors. An update will be provided at the company's results next month though no final deal is expected to have been agreed by then.

Nigel Hugill, the managing director of Chelsfield, said: "Cutting the cost of debt [at Global Switch] is a stated objective. We are discussing a number of refinancing alternatives with banks and funding institutions."

The company is weighing the relative advantages of replacing the expensive debt with new bank borrowings or raising money by taking in an equity investor. Talks with possible investors include Morley Fund Management.

It is not thought that an outright sale will result from the negotiations, even though some analysts have urged Chelsfield to return to its core property business. Chelsfield is adamant that it will not divest the business for less than the current book value of £400m, which is unlikely until the market for internet hotels improves. The construction costs of Global Switch's sites was £570m.