Guy Hands' Meridien deal turns to disaster

The private equity backers of Le Meridien have been forced to write off their investment in the £1.9bn buyout of the luxury hotel chain, which has had to be handed over to its banks after a collapse in trading.

The move is a major blow to the reputation of Guy Hands, the financier who put the deal together two years ago. His private equity group, Terra Firma, still manages the chain.

Nomura, Mr Hands' former employer, led the consortium that bought Le Meridien from Compass in a highly leveraged deal. The Japanese bank has had to write off its £213m of equity in the transaction. The other three investors are Royal Bank of Scotland, which is thought to have had exposure of £100m, Abbey National and Alchemy Partners, a private equity house.

All four have written off their investment as the chain, which has breached banking covenants, is now reckoned to be worth just £700m, compared with its debts of £1bn. Control has been ceded to the consortium of 20 banks owed the money, which includes RBS. Other lenders include Lehman Brothers, Merrill Lynch and CIBC World Markets.

The Meridien deal closed just months before the 11 September terrorist attacks, which severely reduced demand for hotel rooms. More recently trading has been affected by the Iraq war and the outbreak of the deadly Sars virus, while the business downturn has curtailed corporate demand. The chain has about 140 hotels in 55 countries, including London's Waldorf and Grosvenor House hotels.

Earnings before interest, tax, depreciation and amortisation have fallen to £70m, when in 2000 Meridien generated an operating profit of £170m.

Mr Hands has sent in new management team, led by Stephen Alexander, who replaced Juergen Bartels as chief executive of Meridien last month. Managers will present a rescue plan to the lender banks on 19 May.

Meridien has sacked 2,000 staff over the past year, to reflect the slump in demand, and is selling a number of hotels.

While other hotel operators, such as InterContinental, have flagged up similar problems, it is the scale of Meridian's debt, incurred through a classic leveraged buyout deal, that makes its position more precarious.

Terra Firma – whose latest project is the mooted bid for the waste disposal group Waste Recycling – took on the management of Nomura's £2bn private equity portfolio and has raised a further £1.5bn for a buyout fund from institutional investors.

Terra Firma maintains that, despite the Meridien disaster, the performance of Mr Hands' other investments means that it has still done better than its leveraged buyout rivals over the past 12 months. Its other deals include the £1.7bn acquisition of the British Army's housing for married service personnel.