Migdal is buying a 10 percent stake in Fattal Hotel Management, thereby making a show of confidence in the future of Israel's bruised tourism industry. Of course, it is also true that Fattal, who retains the other 90 percent of his company, means to massively expand in Europe.
The insurer is buying the shares at a pre-money company valuation of NIS 570 million for Fattal.
The Fattal chain has about 40 hotels in Israel and Europe, mainly in Germany, some of which are owned together with Yitzhak Tshuva's real estate group Delek, with Migdal itself, and with the insurer Menorah. In Israel, Fattal owns four hotels and manages 14 others for the Meridian, Magic, Golden Tulip chains, and Club Med. Altogether in Israel Fattal owns 4,500 rooms which generate about NIS 700 million a year, say industry sources. The company's operations branched out into Europe in late 2006.
CEO David Fattal, 50, started his career in the hotel business as a security officer at the Dan Carmel Hotel in the late 1970s. He established the Fattal chain in 1998 after serving as the manager of Africa Israel Hotels for a number of years. Until 2005 the chain's activities were limited to providing hotel services, but then it began acquiring hotels.
Interestingly, while his company is worth more than NIS 600 million, its competitor Isrotel is valued at less than NIS 500 million, and the company he formerly managed, Africa Israel Hotels, is worth less than NIS 400 million. The Dan Hotels, where he began his career, is valued at about NIS 2 billion.
The current deal with Migdal will provide needed cash to finance new acquisitions in Europe and development of existing properties, Fattal says.
"I don't mean to show off, but selling a hotel chain that was established only nine years ago and sold based on a NIS 570 million valuation?" Fattal shows off.
"We have acquired quite a few hotels recently, which we have financed ourselves.
Revenues for hotel management companies like Fattal are usually based on a roughly 3-percent share of the hotel's turnover, or about 10 percent of its operating profit. Theoretically a management company can be profitable while the hotel itself is losing money. But with tourism booming, which it has been this year, profits are good.
"For the time being the company has no plans to move into markets beyond Europe, where hotels generate strong returns," he says. "The tourism industry is growing rapidly all over the world, since people do love to travel, and then there are conferences and other such. Hundreds of millions of people from eastern Europe, China and India have joined the ranks of those able to travel in recent years, so there is a huge surge of activity.
"The reason we invest in Europe, for instance, is that everyone wants to go to Europe. This is why hotels don't follow the normal rules of returns: we pay 30 million euros for a hotel with turnover of 100 million euros, because I believe that I will be able to do great things with it. The situation in Israel is also much better, and if we have security, tourism will be a bonanza."
Asked why he hadn't taken the company public, Fattal answered that selling a stake to an investor was simpler, quicker and cheaper. He doesn't rule out a flotation in the future, once the company is bigger.
In the future Fattal intends to expand the chain to 80 hotels overseas, compared with the current 23. In Israel, the company is investing about $70 million in two hotels in Israel - one in Ramat Hahayal, targeting mainly businessmen, and the Basel Hotel in Tel Aviv, which will be renovated.
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