Analysts said they were not surprised by the decision, which they attributed not only to the state of the market but the nature of Principal itself, which was quoted in London until 1992 when it went into receivership.
One leading broker said: "This simply confirms our long-held view that there are too many quoted companies operating hotels in the UK." He said half the constituents of the hotels sector by number accounted for only 3 per cent of available rooms.
As a result many institutional investors found themselves overweight in the sector and unwilling to entertain a new flotation unless it constituted something different from existing investment opportunities.
The shelving of Principal's flotation follows an uncertain market debut by Thistle Hotels, which had to reduce its price to the bottom of its proposed range to ensure the success of the pounds 1bn issue. Another recent victim of the market's indifference to the sector was Lonrho, which was forced to abandon plans to float off its Princess and Metropole Hotels arm, looking instead to find separate buyers for the division's US and British operations.
Other hotel flotations this year, which have included Millennium & Copthorne, Cliveden, Jarvis Hotels and MacDonald, have met with a mixed response from investors. Both Cliveden and Jarvis are trading below their issue prices.
Paul Slattery, hotels analyst at Kleinwort Benson, said: "Institutions are coming to the view that it is better to back companies you know and managements you trust than these new players."
He added that the City's perception of Principal had suffered from a number of company specific issues. The company's mainly three- and four- star hotels are all in the provinces, which are not enjoying the same increase in demand as hotels in the capital; they are mainly in secondary and tertiary positions; and they are in the main quite old, a small chain in the difficult mid-market sector.
The failure of the Principal flotation underscores the emergence of a two-tier market where the larger, London-based chains are enjoying the imbalance between rising demand and a recent under-supply of new hotels. Other companies, including Principal, are thought less likely to enjoy the upswing and more likely to suffer a hard landing come the next recession.
Principal Hotels had expected to be valued at pounds 100m when it returned to the market via a placing to raise pounds 50m, two years after members of the current management team, led by chairman John Lewis, bought the group out of receivership for pounds 65m.
Since the management buy-in in 1994, the group has disposed of six hotels, acquired the freehold of three more and a management contract on a hotel in Dublin.
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