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Revolution at NH Hotel Group: the CEO is out, and an anti-HNA coalition has taken over the board of administration

The general shareholders' meeting of the Spanish group NH voted in support of the removal of HNA representatives from the board, saying it was a conflict of interest as the principal shareholder of the Spanish group NH, the Chinese HNA, had just acquired Carlson Rezidor Hotel Group. Shareholders took advantage to oust the CEO Federico Gonzales Tejera and replace him with another management team.

At the Annual General Meeting of NH Hotel Group shareholders expressed their opposition to the strategy adopted by its primary shareholder, HNA, which owns 30% of the capital. Spanish financial institutions, which still hold the majority, do not accept the done deal of the acquisition of a competitor, Carlson Rezidor Hotel Group, and declared a conflict of interest justifying the exit of HNA representatives from the board of directors.

Four new members have been named (Paul Daniel Johnson, Fernando Lacadena, José María Cantero and María Grecna) in the interim until the conflict has been resolved through negotiations or a change in strategy. In addition, the Chairman and Vice Chairman have been changed: Alfredo Fernández Agras, as Chairman of the Board of Directors and Vice Chairman of the Delegated Commission, as well as Co-Chairman of the Company, assisted by José Antonio Castro, Chairman of the Delegated Commission and Vice Chairman of the Board, formerly Director of Hesperia. José Antonio Castro joined NH further to the merger of the two rival groups. The former management of Hesperia is gaining power to the detriment of the present leaders.

This shift within the board of directors led to the removal of Federico González Tejera, who was called upon three years ago to rescue NH and set it back on the right track. While pleased with the work accomplished through the Strategic five-year plan, the board did not re-relect Federico González Tejera and instead nominated a management team with Beatriz Puente as Executive Managing Director of Administration and Finance (CFO), Ramón Aragonés as Executive Managing Director of Business and Operations, and Rufino Pérez as Executive Managing Director of Corporate Resources. Their mission is to pursue the Strategic Plan and improve financial results as much as possible while preserving the interests of all the shareholders.

HNA reacted by taking legal action to re-establish their rights as reference shareholder. They justify this action through the effort of another shareholder, Oceanwood, an opportunistic investment fund that has a significant share, to push HNA to launch an OPA for the remaining 71% that it does not yet own. HNA group refuses to launch such an operation that it has not planned. It denounces the speculative action of Oceanwood which is acting together with representatives of Hesperia to eliminate the staff responsible for the spectacular recovery of NH Hotel Group.

The conflict will go before Spanish courts and new developments may be expected in the near future.

In response, HNA has distributed a letter to its shareholders to explain their standpoint regarding the situation (source: BusinessWire):

"Dear Fellow Shareholder,

Three years ago, HNA Group rescued NH Hotel Group from the brink of failure by providing a necessary capital infusion. In the time since, we have advocated for the best interests of all NH Hotel shareholders, supported management in the execution of its Five-Year Plan, and worked with the Board to develop full participation by independent directors.

We are disappointed to have been disenfranchised of our fundamental rights as a shareholder under the Spanish Good Governance Code, which provides large shareholders with the right to proportional board representation. Despite having to relinquish our representation on the NH Hotel Board to Oceanwood’s slate of dissident nominees during the pendency of any court action to seek restoration of our rights, HNA remains committed long-term investors.

Make no mistake, a group of hedge funds that acquired shares in NH Hotel after HNA made its initial investment are seeking to realize short-term profits by trying to force HNA to make a tender offer to acquire the 71.5% of NH Hotel’s outstanding shares that it doesn’t already own. As NH Hotel’s largest strategic shareholder, HNA has no imminent plans to change the profile of its investment. We will continue to be an active, vigilant shareholder. HNA will not be coerced into launching a tender offer to meet the short-term return needs of an ‘event driven’ hedge fund at the expense of NH Hotel, its employees, and other shareholders.

Oceanwood, however, has already made clear that it is not interested in advancing a sustainable hospitality industry strategy. It took the newly constituted NH Hotel Board a single meeting to prove that it has no intention to act in the best interests of the Company and its shareholders.

Immediately after Oceanwood took effective control of our Board, its directors combined their voting power with Hesperia to terminate without cause NH Hotel CEO Federico Gonzalez. They did so in clear defiance of the independent directors who voted against Mr. Gonzalez’s removal, as well as the will of NH Hotel’s non-HNA shareholders who just hours before had supported Mr. Gonzalez’s reappointment as director and CEO at the General Shareholders Meeting.

In light of this precipitous action, Oceanwood, Jose Antonio Castro, Alfredo Fernandez, and the new directors owe NH Hotel shareholders an answer to the following important questions:

1. Who will Oceanwood and Hesperia propose as NH Hotel’s next CEO?

  • The outcome of yesterday’s shareholder vote supporting Mr. Gonzalez was consistent with the tenor of recent private conversations HNA held with some of NH Hotel’s largest institutional shareholders – the same shareholders who voted in favor of Oceanwood’s proposals – who expressed support for Mr. Gonzalez.
    Both Oceanwood and Mr. Castro were outliers in this regard. Oceanwood’s Julian Garcia Woods stated frequently that Mr. Gonzalez lacks financial acumen. Further, he expressed openly his irritation that Mr. Gonzalez refused to “apologize” for acquiring Hoteles Royal in 2015. Similarly, Jose Antonio Castro had openly stated his desire for NH Hotel to abandon its NH Collection brand strategy and focus instead on his Hesperia brand.
    HNA believes that this sudden and reckless change in management was punitive in nature. It will destabilize the Company at an important strategic inflection point and destroy shareholder value. We are eager to see who Oceanwood and Mr. Castro put forward as NH Hotel’s next CEO.

2. Now that Oceanwood has terminated Mr. Gonzalez, why should shareholders support Oceanwood’s plan to turn NH Hotel into the equivalent of a Liquidating Trust?

  • For many years NH Hotel underinvested in its brands and its physical hotels. Under the leadership of CEO Federico Gonzalez, and with the support of the prior Board, that changed. The future prospects of NH Hotel had improved dramatically as Mr. Gonzalez and the management team realigned the Company’s cost base, reduced debt, and increased profitability.
    Mr. Gonzalez had reviewed and agreed with the prior Board, including the independent directors, management’s plans to reduce its cost base. This was reaffirmed by the majority of the Board last May at the conclusion of a two-day seminar where directors again reviewed the Company’s cost reduction plans with NH Hotel management.
    Here again Oceanwood and Jose Antonio Castro are outliers. Each has contended that NH Hotel’s cost structure is out of control, despite extensive analysis to the contrary. Now, with the removal of Mr. Gonzalez, they are confirming their intention to turn NH Hotel into the equivalent of a Liquidating Trust. They have no plan other than to sell off strategic assets, reduce costs by a magnitude dangerously in excess of the Board approved Five-Year plan, gut the capital expenditures program, and pay dividends out of proceeds from asset sales instead of from sustainable earnings.
    Their motivations to do so may be partly explained by the following: Mr. Castro uses Hesperia’s stake in NH Hotel to collateralize his loans from Santander and the loans come due in December 2017. Oceanwood has previously demanded that NH Hotel sell its Jolly Madison Towers property in New York City rather than invest in future growth through refurbishment, using the sale proceeds to pay a one-time special dividend which would significantly ease the burden of Mr. Castro’s indebtedness.

3. How does Oceanwood intend to resolve Hesperia’s management contract?

  • Jose Antonio Castro has been seeking to renegotiate the terms of his management contract with NH Hotel. The difference between what the previous NH Hotel Board had been willing to offer Castro and what he has been willing to accept is significant. The NH Hotel Board had determined on several occasions that Mr. Castro’s “ask” was inconsistent with standard market rates and terms for similar situations. Did Oceanwood trade away millions of Euros of NH Hotel shareholders’ money in return for Mr. Castro’s vote at the General Shareholder Meeting?

4. Did Oceanwood promise Mr. Castro that NH Hotel would waive millions of Euros in termination fees if he decides to take his hotels back and award them to a competitor?

  • Oceanwood and Jose Antonio Castro’s campaign to usurp control of the NH Hotel Board was based on the flawed premise that HNA has a current conflict for an event that may or may not occur in the future.
    Jose Antonio Castro has a potential future conflict of his own: He has clearly stated his preference for awarding the Hesperia Hotels management contract to an NH Hotel competitor. By Oceanwood’s logic, Mr. Castro should step away from the Board until this conflict is resolved, and HNA therefore intends to protect its investment by seeking the removal of Jose Antonio Castro and Javier Illa from the Board.

5. Will Oceanwood’s newly elected directors recuse themselves from discussions regarding refinancing NH Hotel’s unsecured convertible bonds and senior secured high yield notes?

  • In addition to its equity stake, Julian Garcia Woods has represented that Oceanwood holds more than €80 million of NH Hotel’s €250 million issuance of unsecured convertible bonds and between €60 and €80 million of NH Hotel’s €250 million 2019 senior secured high yield notes. We therefore expect new Co-Chair Alfredo Fernandez and all of the newly elected Oceanwood directors – including Fernando Lacadena Azpeitia who currently sits on the Board of Merlin Properties with Oceanwood’s Fernandez – to recuse themselves from any discussions regarding NH Hotel’s capital structure and capital allocation plans.
    Oceanwood’s directors have a clear conflict of interest and cannot act as objective fiduciaries to NH Hotel shareholders as participants in such discussions.

Now that Oceanwood has seized control of the NH Hotel Board and taken the drastic step of firing a proven CEO, we encourage our fellow shareholders to join us in holding them accountable to ensure that the narrow interests of a minority do not supersede what is best for the majority. Continue asking Oceanwood and Hesperia tough questions. Demand honest answers.


Charles Bromwell Mobus, Jr.
Former Co-Chairman and Chairman of the Board
NH Hotel Group"

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