LE MERMIEN LOMBOK (INDONESIA) essayCASELET: LE MERMIEN LOMBOKCASELET: LE MERMIEN LOMBOK (INDONESIA)
You are the Managing Director of a famous investment bank, headquartered in Hong Kong with regional responsibilities. You have called on the Asia Pacific Area Head for Le Meridien Hotel Group (“Le Meridien”), a large and well-known French hotel operator and part of a larger travel and leisure group owned at this time by Air France. Le Meridien has been quite successful in Thailand with a “town & resort” or “business & pleasure” strategy. In Thailand, Le Meridien has a city hotel in downtown Bangkok and a resort hotel on the island of Phuket, one hour away by air. Business travelers who stay at the city hotel earn privileges toward staying at the resort hotel, and vice versa. This strategy has worked very well, notwithstanding fierce competition in the downtown Bangkok market (e.g., a Grand Hyatt, a Regent and an Intercontinental hotel are all within 5 minutes walking distance of Le Meridien-Bangkok).
Le Meridien proposes to pursue a similar strategy in Indonesia. It has just opened a. splendid city hotel in Jakarta. It has entered into an agreement with a medium-size local partner, the Modern Group (whose core activity is the local distribution of Fuji film, cameras and related products), to buy land and build up to 4 resort hotels on 4 different islands in Indonesia. The first resort hotel will be built on the island of Lombok, adjacent to the island of Bali and one hour by air from Jakarta.
The total project cost for the resort hotel, Le Meridien Lombok, is estimated to be US$ 18 million. Le Meridien has the need to raise a US$ 9 million 9-year term loan (in USD or Rupiah) to finance the purchase of the land and the construction of the resort hotel. So effectively, there will be 50% equity and 50% debt in the capital structure. Le Meridien is also looking to find one or more additional equity investors to invest approx. US$ 3.42 million for a 38% stake in the venture. The final ownership structure of the Joint Venture company, which will own the land and the hotel, is contemplated to be as follows:
Investor Percents SD Modem 51% 4.59 Meridien 11% 1.00 New Investors 38% 3.42
Le Meridien says it is so confident of the success of the hotel that it has committed, unusually for a hotel management company, to take a US$ 1 million equity stakes in the project.
Questions A. ASSUME you are the Asia Pacific Area Head for Le Meridien. You have flown to Paris, France to make a presentation to your Board of Directors, to convince them to approve the Le Meridien Lombok hotel project. 1. Please provide FOUR (4) persuasive arguments why the Board should approve this project. (Hint: One or more of the four reasons should be a “money” argument, for which you will need to answer Question 1 in the Financial Model, attached.) 2. In this case, the Board, of Le Meridien is being asked to invest $1 million, an unusual request for a hotel management company. Please give TWO (2) solid reasons to the Board why this investment is necessary in this case. B. NOW ASSUME you work for the investment bank offering to help the clients, Le Meridien and P.T. Modern, to raise US$9 million in debt and $3.42 million in equity to build the first 5-star hotel on Lombok island, to be managed by Le Meridien, Please answer the following questions.Please prepare answers to each of the Questions on the Financial Model.
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You are the Managing Director of a well-known investment bank with regional responsibility located in Hong Kong. You've reached out to the Asia Pacific Area Head of Le Meridien Hotel Group ("Le Meridien"), a prominent and well-known French hotel chain that's part of a larger travel and leisure conglomerate controlled by Air France at the time. With a "town & resort" or "business & pleasure" strategy, Le Meridien has been highly successful in Thailand. Le Meridien has a city hotel in Bangkok and a resort hotel on the island of Phuket, which is about an hour away by plane. Business visitors who stay in a city hotel earn benefits that may be used to stay in a resort hotel, and vice versa. Despite severe competition in the central Bangkok market, this method has proven to be quite effective (e.g., a Grand Hyatt, a Regent and an Intercontinental hotel are all within 5 minutes walking distance of Le Meridien-Bangkok).
In Indonesia, Le Meridien wants to pursue a similar method. It has recently opened a magnificent city hotel in Jakarta. It has agreed to buy property and build up to four resort hotels on four distinct Indonesian islands with a medium-sized local partner, the Modern Group (whose major operation is the local distribution of Fuji film, cameras, and related products). The first resort hotel will be developed on the island of Lombok, which is near to Bali and about an hour's flight from Jakarta.
The resort hotel, Le Meridien Lombok, is expected to cost over US$ 18 million to build. Le Meridien will need to raise a US$ 9 million 9-year term loan (in USD or Rupiah) to fund the land purchase and construction of the resort hotel, resulting in a capital structure with 50 percent equity and 50 percent debt. Le Meridien is also searching for one or more additional equity investors to spend about US$ 3.42 million in the company for a 38 percent share. The Joint Venture firm, which will hold the land and the hotel, is expected to have the following ultimate ownership structure:
Percentages of Investors SD (Serial Data) Modem Meridien Meridien Meridien Meridien Meridien Meridi 1.00 percent 11 percent New Investing Prospects 3.42 percent 38 percent
Le Meridien says it is so confident in the hotel's success that it has agreed to acquire a US$ 1 million ownership investment in the project, which is unusual for a hotel management business.
Questions A. PRETEND you are Le Meridien's Asia Pacific Area Head. You've flown to Paris, France, to make a pitch to your board of directors, hoping to persuade them to approve the Le Meridien Lombok hotel project. 1. Please present FOUR (4) compelling reasons for the Board's approval of this proposal. (Hint: one or more of the four reasons should be based on money, for which you must answer Question 1 in the Financial Model, which is attached.) 2. In this situation, Le Meridien's Board of Directors has been asked to invest $1 million, which is an extraordinary request for a hotel management firm. Please provide the Board with TWO (2) compelling arguments why this investment is important in this circumstance. B. NOW PRETEND you work for an investment bank, and you're trying to help Le Meridien and P.T. Modern raise $9 million in financing and $3.42 million in equity to develop Lombok's first 5-star hotel, which will be managed by Le Meridien. Please respond to the questions below.Please prepare answers to each of the financial model's questions.
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