1 Nishan Sumanadeera is a Sri Lankan Entrepreneur, businessman, director and co- founder of Frontier Capital Partners, a boutique investment consultancy fi rm specialized in Investment Banking services and innovative investments in Sri Lanka. He together with his companies have invested into various industry sectors through private equity participation with foreign and local investors Mr Sumanadeera during his 25 year career has served as the chairman, board director, country manager and legal & fi nancial consultant for many companies in Sri Lanka and overseas. www.sumanadeera.com UNEVENTFUL MAY DAY 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 B lashed passed one after the other it took a few seconds until the penny dropped – then suddenly there was a mad B lurry of phone calls. In the mayhem the founder Chairman of the Con B i B i 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 Con B i B i 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 of B ice in Rajagiriya, LOLC’s Chief Executive and Managing Director, Kapila Jayawardena sums it up. “You wouldn’t think it, but we are very B lexible 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 Con B i B i in May 2010, there was a rush into leisure,” says Jayawardena, who does not go into the details behind the Con B i B i 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 Con B i B i 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 Con B i B i Group was such, that acquiring the four star Con B i B i Hotel Holdings (Club Palm Garden Hotel) and Riverina Hotel, would automatically result in ownership of the B ive star Eden hotel. 2 Prepped with these little gems of knowledge, Sumanadeera made some phone calls – to a few of the larger shareholders of Con B i B i, outside the Furkhan family. While Con B i B i Management Services, a company controlled by the Furkhan family, held the single largest chunk of Con B i B i 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 B ind 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 B irst specialised leasing company in 1980, LOLC had expanded well beyond its leasing beginnings into Sri Lanka’s biggest non bank B inancial 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. 3 Seated in his of B ice 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 diversi B ied conglomerate they had still not diversi B ied into tourism. So I felt Con B i B i 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 Con B i B i, 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 Con B i B i 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 Con B i B i directors immediately following the acquisition, preventing disposal of Riverina and Con B i B i 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. 4 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 Con B i B i before LOLC issued its mandatory purchase offer. It turns out LOLC had snatched Con B i B i 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 B inalised because some of the shareholders did not agree. Then came LOLC,” said M T A Furkhan. Ishara Nanayakkara was appointed Chairman of the Con B i B i Group in June 2010 and Ms. Amarasinghe was also appointed a Director of the Con B i B i 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 diversi B ied 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. 5 Nishan Sumanadeera is a Sri Lankan Entrepreneur, businessman, director and co-founder of Frontier Capital Partners, a boutique investment consultancy fi rm specialized in Investment Banking services and innovative investments in Sri Lanka. He together with his companies have invested into various industry sectors through private equity participation with foreign and local investors Mr Sumanadeera during his 25 year career has served as the chairman, board director, country manager and legal & fi nancial consultant for many companies in Sri Lanka and overseas. www.sumanadeera.com