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KLE looks to fees, royalties for new revenue stream

Published:Tuesday | April 4, 2017 | 12:00 AMNeville Graham
Gary Matalon, CEO of KLE Group Limited.

Last year, KLE Group Limited shed loss-makers, took on a new partner, rebalanced its finances, and made headway in rolling out the first franchise for its flagship restaurant operations.

This year, the company is focusing on new partnerships through franchise deals in Jamaica and around three in foreign markets, and it is bit closer to entering a different side of the hospitality market - accommodations.

Site preparation of the 8.14-acre property slated for the Bessa boutique villa project is under way and a model unit is currently being developed, said KLE Group CEO Gary Matalon.

KLE is a minority partner in Bessa, along with Sagicor Life Jamaica. However, the company was hard-pressed to deliver the US$350,007 that its agreement with Sagicor required, and has farmed out a portion of its financial obligation to an unnamed group of investors, dubbed the 'Participants'. Matalon identified them only as investors inside the KLE Group.

KLE came up with less than a third, US$100,007 on its own, and secured the other US$250,000 from the Participants.

The group will pay over the funds directly to KLE, which in turn would pay it over to the Bessa Partnership, and will account to the Participants on the performance of their investment.

The entertainment company assumes no risk under the side agreement and is to be paid a fee by the investors.

"KLE does not assume the risk of this investment, and it is expressly acknowledged by the Participants that they undertake this investment at their own risk," the company said in a note to its audited accounts.

Matalon said KLE's share in Bessa, which is located in Oracabessa, St Mary, is 25 per cent, while Sagicor Life owns 75 per cent; and that the land acquired for US$2,000,007 for the project is being contributed by KLE.

The final project approvals were received last month, and construction of the villas is expected to start around June, he said. The development, comprising 54 villas aimed at the luxury market, is expected to last two years.

The investment in the Bessa joint venture was valued at cost at year end December 2016 as there had been little visible activity on the project up to that point.

Another of KLE's holdings, T & R Restaurant Systems Limited, was valued at $77 million, representing a minority 49 per cent stake. The other 51 per cent was sold to Josef Bagdonovich, and with that deal, a 100 per cent subsidiary was reclassified as an associate company.

KLE reported a gain of nearly $164 million from sale of the shares, an injection that allowed the company to clear its balance sheet of $157 million of accumulated deficits.

Consequently, its near $34 million of negative equity in 2015 was totally wiped away, and its balance sheet now reflects a positive capital base of $130 million.

The transaction also turned a net loss of $64 million into net profit of $165 million. More than $30 million of the losses in 2015 related to the nightclub operations that were discontinued in 2016, leaving only the restaurant segment.

Having disposed of Fiction and Famous nightclubs over time, Matalon says the turnaround strategies are paying off.

"We are extremely pleased with the outcome. With all of the strategic work that the board put in and that the management executed, it's at testament to our resilience," he said. "The swing from the level of losses that we had last year to the profitability that we are seeing now is simply phenomenal".

The market rewarded the stock, pushing it to a peak $3.51 at midweek. That's more than double the trading price a year ago.

T & R trades as Franjam, the vehicle being used by KLE to franchise and expand the Usain Bolt Tracks & Records (UBTR) restaurant chain.

The deal would have served to deepen Bagdonovich's partnership with KLE Group, in which he first acquired a stake in 2014 and is now the single largest shareholder with 23 per cent ownership. He also sits on the entertainment company's board.

KLE remains in charge of building out the franchisees, working through Franjam. Matalon, as CEO, retains executive authority over due diligence, planning and execution. He says he works along with a small team while recruitment for Franjam continues.

The first UBTR franchise opened in Ocho Rios last September, operated by Marsha and Joshua Jahmnani. Another restaurant is soon to open in Montego Bay, with hotelier Chris Issa as the operator.

"Montego Bay is under construction as we speak and that should be open in the summer," said Matalon. "Before the year is out, we expect our first international franchise to open," he added, indicating that plans to grow the chain internationally remain in play.

Another three foreign franchises are in the offing, he added.

The reframing of KLE Group is expected to bring in new streams of revenue in the form of royalties from the UBTR franchises, and eventually profit share from Bessa.

The side deal that KLE has with investors in Bessa will also give it a second bite of the cherry, as under its agreement with the 'participants', the entertainment company will be paid an annual fee to keep watch over the investment.

The administration fee is priced at one per cent of the funds invested by individual participants. KLE also gets a 15 per cent share of the profits they earn from Bessa, but only if their returns achieve a specified hurdle rate of 12-month Libor plus four per cent.

"Any new revenue stream that we add now will basically fall to the bottom line and for us, that is very good," Matalon said.

He also indicated that a new product is to be unveiled later this year under the franchise operation.

"Franjam is currently working on another concept to add to the portfolio," he said, but declined to offer details of the plan.

"We expect that it will start seeing a rollout also before the end of the year. This will add a whole new dimension to what we offer to the public, that will capitalise on the already established selling and marketing infrastructure that exists for franchising," the KLE boss said.