The Kerzner quake
“I feel the earth move under my feet
I feel the sky tumbling down…”
This past week in The Bahamas will perhaps be the most impactful and memorable in a year crammed with challenges, catastrophes, conflicts and changes. Ironically, this week, following one during which many gave thanks for the year’s blessings, was marked by events for which we are decidedly not grateful. There was the conviction of a man of the cloth following a protracted trial that will challenge the credibility of our Christian institutions for years to come; Parliament’s adoption of the constituency boundaries commission report, which sets the stage for the approaching combative choreography for control of Parliament for the next five years; yet another destructive Bay Street fire, albeit not as devastating as the one of a decade earlier; and the shocking and surprising announcement that ownership of the gem in our tourism crown was transferred from a visionary entrepreneur to its century-old successor. Therefore, this week, we would like to Consider This…what does the change in ownership of Kerzner portend for our patrimony?
Sir Sol Kerzner
Sir Sol Kerzner is a quintessentially visionary entrepreneur who has single-handedly transformed our tourism product. When he first considered investing in The Bahamas during the Pindling-era, Sol Kerzner was initially rebuffed by that administration. At the time, pursuant to the Commonwealth Accord on South Africa – the Nassau Accord – that was adopted by the Commonwealth Heads of Government Meeting on October 20, 1985 in Nassau, The Bahamas and other Commonwealth countries had agreed to “a ban on government contracts with majority-owned South African companies.” However, following the dismantling of apartheid in South Africa and the release of Nelson Mandela from prison, the Free National Movement (FNM) government was free to negotiate with Sol Kerzner to invest in The Bahamas.
Sol Kerzner’s Sun International has invested more than $2 billion in its Bahamian tourism plant. The company was listed on the New York Stock Exchange, later changed its name to Kerzner International and then, during the Christie Administration, was taken private, purchasing its shares from the public by borrowing billions of dollars to achieve that objective. Kerzner International, which has invested in The Bahamas, Mauritius, Malta, the Maldives, Dubai and Mexico, among other places, pledged its Bahamian assets in order to borrow $2 billion to repurchase its shares. That was accomplished at a time when the world economy, including The Bahamas, was experiencing tremendous growth and Kerzner was performing very well.
Then, in late 2008, the bubble burst, ushering in the longest, deepest and most challenging, gut- wrenching world recession, throwing many companies and countries into bankruptcy, increasing unemployment, and destabilizing some of the world’s largest economies, including the United States of America, Italy, Spain, Greece and others. Even China, which was undergoing unprecedented growth, experienced a contraction in its economic growth.
For the past year, Kerzner attempted to restructure its $2 billion debt, which recently culminated in $175 million of that debt being forgiven by the “transfer” of its shares to Canadian-based Brookfield Asset Management Inc. (“Brookfield”), a company with more than $160 billion in assets. Make no mistake about it, no matter what nomenclature is employed to describe the Kerzner quake, this “transfer” was actually a foreclosure for Kerzner’s failure to pay its debts on a timely basis. An important question that needs to be answered is: does the Bahamas benefit from the payment of stamp tax from this multi-billion dollar transfer? And if so, how much stamp tax will we earn from this transaction?
Sir Sol Kerzner, chairman and CEO of Kerzner International, said that “this transaction will permit Kerzner to move forward as a management company, allowing us to get back to doing what we do best – designing and managing world-class destination and luxury resorts under the Atlantis and One&Only brands.”
Under the agreement with Brookfield, Kerzner will continue to manage and operate the properties which it previously owned. Assurances have been given by Kerzner, Brookfield and The Bahamas government that Brookfield will keep future capital expenditures and maintenance levels consistent with years past, maintain current employment levels and invest the same level of resources into local and international marketing to support tourism in The Bahamas and maintain brand visibility.
What does this all mean?
What does this mean for The Bahamas? Let’s not delude ourselves. Kerzner’s properties have new owners – a multi-national conglomerate, Brookfield. Kerzner has undergone and will continue to undergo a corporate and business model restructuring. Although Kerzner will continue to manage the properties that it previously owned, Brookfield will now meticulously scrutinize how it can increase the company’s profits and add shareholder value. This acquisition will significantly reduce the company’s interest expense, by virtue of Brookfield’s forgiveness of $175 million of Kerzner’s debt.
One of the first places that new owners look to reduce cost is the cost of personnel. Kerzner’s salaries expense now stands at $169 million per annum for its 8,000 Bahamian employees. Kerzner has 18,000 employees around the world. Clearly serious considerations will be given to rationalizing the payroll expense over the months and years ahead, notwithstanding the assurances that were given by Brookfield, Kerzner and The Bahamas government that the company’s Bahamian employees should not be concerned about job security. There is no such thing.
Without arguing about the merits or potentially catastrophic consequences of The Bahamas government’s decision to allow Kerzner to leverage its Bahamian assets in order to take that company private, there is a vital national security issue that must be considered for the future, and it is this. In the absence of direct investments by Bahamians in our primary industries, should not The Bahamas government eagerly encourage companies like Kerzner, Baha Mar and foreign-owned banks to be as widely held by Bahamians as far as is practical, so that our citizens can benefit from the fortunes of such companies? If politicians are truly going to put Bahamians first as they are fond of declaring, shouldn’t they encourage foreign investors to invite Bahamians to participate in the ownership of such ventures? This is all about empowerment and, in the case of Kerzner, this was a golden opportunity that was myopically and mistakenly missed.
Finally, it is important that we not lose sight of Brookfield’s end game. Brookfield is in business to make money, lots of it, and we should not be surprised if one morning we awaken to newspaper headlines that Brookfield has sold its Kerzner investment to the highest bidder in order to realize enormous capital gains on its investment in that company.
For now, the jury is still out on whether Brookfield will be a similarly exemplary corporate Bahamian citizen as we have experienced with Kerzner. Understandably, Bahamians in general and employees on Paradise Island in particular are correct to be anxious about the surprising developments of the last week that have been created by the Kerzner quake and its ultimate effect on our country’s wellbeing. Only time will tell.
•Philip C. Galanis is the managing partner of HLB Galanis & Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to firstname.lastname@example.org.