An Inter Press Service Feature
BUDAPEST, Jan 19 (IPS) - The collapse of a multi-million dollar deal in which a U.S. company attempted to take over Hungary's last state-owned hotel chain, is likely to harm future attempts to lure foreign investment to Budapest.
In its first ever venture abroad Dallas firm, American General Hospitality (AGH), spent more than a year's effort and an estimated one million dollars pursuing the right to buy 51 per cent of the 14-property HungarHotels chain for 57.5 million dollars.
At the last minute, however, American General found itself in the vortex of a political controversy when Socialist Prime Minister Gyula Horn last week made an unexpected intervention and stopped the deal from going through in what observers believe may be a gambit to win public favour with nationalistic Hungarians.
Officially, the government of reformed communists cited "professional shortcomings" in its own privatisation agency's handling of the deal, and for the third time in five years of trying to sell the properties, it declared the tender "unsuccessful" and closed negotiations with American General.
The decision sparked immediate protests from within the ruling Socialist-Alliance of Free Democrats coalition as well as from opposition parties.
One of the most notable people objecting to the prime minister's decision was Socialist Finance Minister La'szlo' Be'kesi, the respected architect of a tough new economic reform package.
Opposition also came from Commissioner of Privatisation Ferenc Bartha, appointed to his position by the Horn government only six months earlier, who was fired by Horn after being ordered to return home while attending a high-profile conference in Cleveland, aimed at promoting U.S. investment in Eastern Europe.
According to Horn, Bartha's failing was not securing a higher price for the properties which the prime minister felt are worth ten million dollars more for the percentage share sought by the U.S. firm.
But while the politically shrewd Horn may have won domestic support for the decision, independent analysts predict Budapest is likely to lose favour with an international business community which have up to now viewed Hungary as being far and away the best investment climate in the former Soviet Bloc.
"One can already see from reactions that the investment community quite upset," said Tibor Vidos, director of the GJW political consultancy firm.
And pointing to what he views as a new anti-investor trend, Vidos notes: "Tax breaks that had been granted some years ago for the duration of several years have recently been removed.
"This fits together with current HungarHotels issue in that a deal that's been approved by one state body or the previous government can then be declared void by new government. How predictable are things in Hungary? That's the message."
To date, Hungary has attracted more investment than Poland, the Czech Republic and Russia put together, for a total of 7.5 billion dollars.
The Socialists, before their landslide victory last May, had strongly criticised the previous government's slow pace at selling state assets and campaigned to attract more Western investment with a streamlined privatisation plan. Since the new government assumed office, however, privatisation has ground to a halt pending a new privatisation bill that is not expected to pass before next March.
The country achieved only half of its investment targets for last year, and critical economic reforms depend on foreign interest picking up to 2.5 billion dollars a year over the next three years.
HungarHotels was to be the first major sale to take place under the new government. "The way I viewed it, if we got passed (the elections), then the momentum would shift to our side," said Gavin Susman, a U.S. real estate consultant who advised American General on the deal.
"The government would want to say, 'Look, American General is confident in Hungary and in our government. They're pumping almost 60 million dollars into Hungary.' Well, of course, I was wrong."
The prime minister's chief complaint was that AGH's bid was too low, despite the fact that it was already 10 million dollars higher than those of the only other two bidders, including the Intercontinental hotel group.
As it was finally offered, the chain consisted of seven hotels in Budapest, four of which are rated four-star, the rest being three- star with seven in the countryside. Before taxes, the chain generated a 10 million dollars profit last year, according to the state secretary who announced the rejection of AGH's bid.
The prize property of the deal is the Forum, a first-class business hotel in the centre of the capital along the Danube river. While in need of modernisation, the Forum already competes with the city's few five-star establishments.
Critics of the deal invariably point to the Duna Hotel, which Marriott bought in 1993 for 53 million dollars. Susman and others counter that the Marriott bought 100 per cent of that property, while only 51 per cent of the HungarHotels package was up for sale.
Also, while the Forum alone is worth a high price, many of the other hotels in the chain are old ventures whose need for renovation draws down the HungarHotels' overall value.
Horn first stepped into the deal in mid-December, assigning an government body to review the State Property Agency (SPA) decision to sell to AGH.
The chief of the review committee, Sa'ndor Rubicsek, later told the press: "We're not experts in the hotel business," adding that despite Horn's insistence that he do so, "I can't prove whether the hotels could be sold at a higher price individually than as a group."
Nonetheless, the committee turned up the fact that the SPA last did its own valuation of the chain in 1991 instead of immediately before the latest tender, a "mistake" enough to derail the deal and fire Privatisation Commissioner Bartha, Horn contended.
Whether a new valuation would demonstrate that the property is more valuable is subject to dispute.
"Hotels don't just get better with time. They might get more 'mature,' but that normally means the decoration needs redoing," said Tim Randall, author of the "Good Living Guide to Hungary," a hotel and restaurant review book.
"The biggest problem with the catering industry in Hungary is that by not privatising the hotels, it is costing the country a fortune in lost tourism development."
Tourism is Hungary's largest industry after agriculture, and the HungarHotels chain represents approximately 35 per cent of Budapest tourism accommodation.
Despite his own frustrations and the current political repercussions of the failed deal, Susman believes Horn may have the last laugh yet.
"I think the vast majority of Hungarians agree with Horn," said Susman. "In the (local) press and among the populace, this has been seen as an example of foreigners coming in on the cheap trying to buy Hungarians' treasured assets."
Susman suggests the whole controversy could be a calculated bid on Horn's part to win points with voters by making a show against foreign investors now in anticipation of the much larger privatisations of the utility companies slated for later this year.
Those are certain to make a much bigger impact on all voters in the form of energy and telephone rate hikes.
"You're talking about a survivor," says Susman.
"You're talking about someone who has amazing forward vision and a great appreciation for what the people are feeling. Let's remember who Horn is," Susman added, recalling the key role the prime minister played as foreign minister in Hungary's last communist government, in opening the country's borders to fleeing East German refugees, ahead of the fall of the Berlin Wall.
"And no one expected him to come back the way he did after four years in the last opposition. He's an incredibly shrewd politician."
© Inter Press Service (2014) — All Rights Reserved. Original source: Inter Press Service