Bill Gates and Prince al-Waleed bought Four Seasons for $3.8 billion near a market peak, feuded over matters large and small, then made up; inside a rare partnership of giants
WSJ-A decade ago, two of the world’s wealthiest men came together to buy Four Seasons Holdings Inc., home to some of the most expensive lodging around.
The deal was surprising both for its lofty price tag, $3.8 billion, and for the unusual partnership, involving tech titan Bill Gates and Saudi Prince al-Waleed bin Talal.
The financial crisis soon pummeled the luxury-hotel business. The partners then took to feuding, about matters ranging from helping fund new hotel developments to who should be chief executive. After a truce in 2013, they have been trying to whip their investment into shape.
It has been no slam dunk, falling short of ambitious targets for new hotel developments. At the same time, the focus on fast growth has been causing some business partners and industry analysts to question whether standards and brand appeal can be maintained as Four Seasons hotels become more numerous.
In buying Four Seasons, Mr. Gates and Prince al-Waleed were at the forefront of an investment trend. The superrich, often through structures called family offices, increasingly have been teaming up to acquire whole companies, planning to keep them long term.
Family offices hold more than $4 trillion in assets, approaching the total invested in hedge funds and private-equity funds combined. The wealthy clans sometimes invest together because they consider themselves like-minded in being long-term investors. That doesn’t guarantee an easy partnership, however, as evidenced in this deal, as it was described by former executives, current and former board members, business partners and industry observers familiar with events at Four Seasons.
The first Four Seasons was a motor lodge in a rundown part of Toronto, opened in 1961 by Isadore Sharp, a son of Polish immigrants to Canada. By the time he began looking to sell the publicly traded company in 2006, Four Seasons was a renowned name in lodging, known for personalized service and top-of-the-line amenities.
Rather than owning its hotels, Four Seasons forms partnerships with investors and developers, then keeps tight control by managing the properties. Four Seasons hotel owners include billionaires such as Oracle Corp. founder Larry Ellison and Beanie Baby mogul Ty Warner.
By 2006, Prince al-Waleed’s investment firm, Kingdom Holding Co., already owned about 25% of Four Seasons stock as well as several Four Seasons hotels. Mr. Sharp consulted him about his sale plans. Prince al-Waleed recommended bringing in Mr. Gates’s investment firm, Cascade Investment LLC, which also owned some Four Seasons shares.
The three men agreed to a deal in which Cascade and Kingdom would each own 47.5% of the company, while Mr. Sharp would have the other 5% and remain chief executive for five years.
The sale closed in early 2007, near the peak of the real-estate boom. The price, 47 times one measure of earnings, reflected the era’s optimism, as well as projections that Four Seasons would continue to expand at an increasingly rapid pace.
“From a valuation perspective, they were seen as having paid a lot of money,” said Jonathan Stanner, former CEO of Strategic Hotels & Resorts Inc., who partnered with Four Seasons to build hotels. “But people reasoned that as long-term investors they could justify the high price.”
The purchase brought together family investment firms with quite-different cultures. Cascade is run by Michael Larson, a low-profile money manager with a brusque manner and penchant for the color pink. Mr. Gates rarely gets involved. Cascade doesn’t have a website and provides scant details of its investments.
Kingdom welcomes publicity, putting out press releases, photos and video clips documenting Prince al-Waleed’s meetings. The prince shot to prominence in 1991 after buying a stake in a predecessor to Citigroup Inc. Forbes confirms that he once accused the magazine of understating his wealth in its annual ranking of the richest people.
Mr. Sharp, in an autobiography, told of being hosted by Prince al-Waleed on his 288-foot yacht in the south of France and joining the prince on the slopes at Jackson Hole, Wyo. Cascade executives, in their work, didn’t share this taste for the high life. When the Four Seasons board met one year at the George V in Paris, a luxury hotel owned by Kingdom, some Cascade employees stayed in more modest accommodations.
Kingdom, which had bought much of its Four Seasons stake in 1994 for less than the 2007 deal price, was happy to let Mr. Sharp continue to run the show. Cascade had paid a premium price, based partly on rosy growth projections from Mr. Sharp’s bankers. The bankers said the company could more than double its number of hotels in a decade, to 160.
The 2008 financial crisis left that plan in tatters, as both hotel developers and luxury-minded travelers cut back. “One can only imagine Cascade felt it had been bamboozled,” said Laurence Geller, an investor who has in the past owned numerous Four Seasons hotels and now owns a property from a rival brand. “What was said was not reality.”
Kingdom marked down the value of its Four Seasons holding every year between 2008 and 2012, according to annual reports it publishes because a small portion of Kingdom trades in Riyadh. The value recovered slightly in the next two years but was still below the 2008 value as recently as 2014, the most recent available data. Cascade doesn’t disclose how it values its Four Seasons stake.
Sarmad Zok, the chief executive of Kingdom’s hotel business, said both investors are happy with their partnership and the performance of their investment.
As occupancy rates fell in the recession, some hotel owners pushed Four Seasons for cost cuts, from scrapping huge displays of fresh flowers to outsourcing laundry.
At one meeting, Cascade executives argued that to save money at a Cascade-owned Four Seasons in Whistler, British Columbia, they should stop replacing guests’ sheets every day unless requested. Mr. Larson’s view was that wealthy travelers were also environmentally conscious. Mr. Sharp disagreed, saying guests paying as much as $700 a night should have their sheets washed daily, according to people familiar with the meeting.
In a compromise, guests were given the option of placing a pine cone on their sheets if they didn’t need them washed every day.
Mr. Sharp said he didn’t recall those conversations with Cascade.
Mr. Sharp stepped down as CEO in 2010 but set the condition that he should be succeeded by his protégé, company president Kathleen Taylor, who then took over. Cascade executives would have preferred an outside candidate because they felt that Ms. Taylor didn’t represent enough of a break with the past and wouldn’t engineer the rapid expansion they were counting on, according to people familiar with the company.
Kingdom executives were supportive of Ms. Taylor, which surprised some Cascade executives who thought that their partners felt the same.
During Ms. Taylor’s tenure, the rift became a distraction. The board found it hard to approve capital commitments needed to win over investors in new hotels. Cascade executives sometimes withheld their support to signal they wouldn’t put capital behind a chief executive they didn’t support, those familiar with the company said.
After months of tension, top executives from Cascade and Kingdom met to settle the matter, gathering in early February 2013 at London’s Savoy hotel. Joining were Mr. Gates and Prince al-Waleed, in one of the few times the two billionaires sat down to discuss their investment.
The meeting ended with a decision to replace Ms. Taylor. “It was time to make a change,” said Mr. Sharp, who drew the job of dismissing her. “It was my role to take the responsibility,” said the founder, now 85. Ms. Taylor declined to comment.
With this dispute over, Cascade and Kingdom sought to put aside their remaining disagreements and push growth and profitability, moving swiftly to make up for the years lost to the recession and its aftermath. Cascade’s hotel specialist, Randy Jack, and Kingdom’s Mr. Zok led the search for Ms. Taylor’s successor and picked Allen Smith, a veteran of real-estate investing.
Messrs. Jack and Zok became more active in running Four Seasons, discussing the business regularly and together courting potential new hotel developers.
Some differences persisted. A few months after the truce, Prince al-Waleed said publicly he favored an initial public offering of Four Seasons within a couple of years.
Cascade appeared to disagree, releasing a brief statement saying it was “in for the long term.”
“There are times when we have a divergence of vision, and when that happens, we have a discussion and the best idea prevails,” said Mr. Zok.
Hotel analysts say Four Seasons has been growing faster than most other five-star brands, at a time when the luxury market is enjoying a boom. In the U.S., luxury room rates and occupancy levels are at or near their highest levels ever, according to industry data tracker STR Inc.
Still, Four Seasons is falling somewhat short of its internal goals, even after revising them downward after the recession. In 2013, the company set a target for 120 hotels by end of this year, according to a person familiar with the matter. It now has 105 properties in operation, with more than 50 under development or in the planning stage. A Four Seasons spokeswoman said the company hopes to get to 108 properties by the end of 2017.
Four Seasons has grown partly by breaking with industry conventions. In New Orleans it plans a 330-room hotel, defying a common belief that building much beyond 200 rooms means luxury service suffers.
The company is comfortable with a larger property in New Orleans because the city is “supply starved with luxury product,” said Mr. Smith, the CEO. He said Four Seasons has quite a few other hotels with over 300 rooms, and “the reviews in terms of service levels remain exceptionally high.”
Four Seasons also has sometimes opened a second hotel in a city, such as New York and Boston. Traditionally, it avoided doubling up for fear of angering an existing owner. Mr. Smith said the company pursues the strategy “judiciously” and “with sensitivity to the owners involved.”
It has become more ambitious globally, opening hotels in emerging markets. The company recently expanded its board to include younger representatives as it tries to woo millennials and engage guests using technology and apps.
Some new Four Seasons properties, such as a 77-room hotel in Miami Beach, have opened to strong reviews. Nadim Ashi, whose investment firm owns the property, said room rates are averaging $1,000 a night.
Four Seasons decentralized some functions last year after listening to some hotel owners’ complaints. They no longer have to buy supplies such as light fixtures from the company, giving them more control of costs.
Some of the changes risk Four Seasons’ reputation, said Piers Schmidt, founder of Luxury Branding, a U.K. consultancy. In a survey his firm did in 2015, based on analysis of hotel reviews on travel website TripAdvisor , Four Seasons ranked 13th. Other surveys rank Four Seasons higher; a 2017 J.D. Power study about North American hotel guest satisfaction that was just released ranked Four Seasons third in the luxury segment, behind JW Marriott and Ritz-Carlton.
Mr. Schmidt said luxury brands that expand rapidly risk diluting their culture by hiring staff too quickly or promoting managers too fast, and “I do believe that’s the case with Four Seasons.”
Four Seasons spokeswoman Sarah Tuite called the results from Luxury Branding’s study “inconsistent with what we see in multiple third-party tracking sources.”
Four Seasons has seen an exodus of veteran executives in recent years. Mr. Smith said that “invariably, changes ensue” when a company shifts from founder-led to a more corporate structure.
A rapid expansion of this sort raises a different concern to Ellis O’Connor, co-head of MSD Hospitality, a unit of Michael Dell’s family office that owns two Four Seasons hotels. “With luxury hotel operation, scarcity is part of the allure,” Mr. O’Connor said. “You can’t turn it into a commodity and get above-market rates.”
People familiar with the Four Seasons operation said Cascade and Kingdom appear determined not to weaken the chain as it grows, and have broken off 14 partnerships with hotel owners whose properties weren’t up to standard.
That is a “clear indication we are striking an appropriate balance between growing the brand and actively managing the quality of our portfolio,” Mr. Smith said. “We will never compromise quality for the sake of growth.”
Appeared in the July 17, 2017, print edition as ‘Billionaires Build an Uneasy partnership.’