Harrods Purchase in 2010

In 2010 Harrods in London was purchased by Qatar Holding, Qatar's wealth fund for 1.5 billion GBP.

At the time of the purchase, I thought this is a crazy price to pay. With 108 million GBP profit in 2011, it is not so bad, but still crazy investment.

When Mohammed Al Fayed sold Harrods to Qataris, people said it was an excellent return business for him. Let's look back.

Mohammed Al Fayed paid for Harrods 615 million GPB in 1985, 25 years later he sold it for 1.5B GBP, profit of 885M GBP.

With annual profit of around 40M (annual average from 1985-2010). Mr. Al Fayed made 1B GBP in profit over the year + 885M GBP profit from the sale. Total profit 1985-2010 1,885 million GBP (1.89B GBP). That is not so bad, right?

Well, let's benchmark it to S&P 500 performance from 1985 - 2010.

Al Fayed brothers finalized the purchase of Harrods in May 1985 and Mohammed Al Fayed finalized the sale of Harrods to Qataris in May 2010.

Performance of S&P 500 from 05/1985 to 05/2010 was 551%.

So if Fayed Brothers would decide to buy S&P 500 index fund for 615 million GBP it would be worth in May 2010 4B GBP with NET profit of 3.39 billion GBP. So, it is safe to say that Mohammed Al Fayed lost 1.5B GBP by investing his money in Harrods and not in S&P 500 index fund. Sorry to say, it wasn't such a good investment after all. S&P 500 index funds are usually purchased by middle-class Americans who are saving money for retirement, and given their track record they are better investors than Mohammed Al Fayed.

With Qataris paying 1.5B GBP for Harrods they will be maybe able to increase the sales, increase the profit, but it will all be marginal in the end, they will have some annual yield (IRR) for 6-7%, but that is it. If they ever decide to sell Harrods they will have hard time finding a buyer ready to pay what they paid for it, so they are even in a much worse position that Al Fayed was in 1985. 

Why do people do this? I have no idea. There are so many opportunities out there, why do something so irrelevant as this is beyond my understanding. Investing must be unemotional, just because Harrods is for sale or Mona Lisa or Colloseum in Rome is for sale, it doesn't mean anything if the return on your money is not right. We are talking business here and serious amounts of money. There is no room for ego when it comes to investing.

Just imagine if Al Fayed Brothers would buy Coca-Cola shares (KO) in 1985, they would make a return until today (April 6 2013) of 2,640% and their profit would be 16.24 billion GBP (without dividends!) and not 1.89 billion GBP. By not buying KO shares they lost 14.35 billion GBP. Buying Coca-Cola is common sense, it is the safest investment I can think of. Their yield on dividends today would be 90%. Imagine that! Harrods makes net profit of around 100 million GBP today, they would make 550 million GBP net profit with Coca-Cola shares. Lets not forget, Coca-Cola was a much bigger name and easier investment for Al Fayed brothers than Harrods. Apparently, Mohammed Al Fayed source the money for Harrods from Sultan of Brunei for Harrods, so imagine him going to the Sultan and saying "give me 615 million GBP to invest and I will buy Coca-Cola shares and sell them 30 years later." I don't think he would see any money from the Sultan, but buying Harrods, that "sounds" like a better deal, you own the real thing not just some sugared water. The word of business is unbelievable ridiculous and that is why with just some common sense you can make tons of money.

Owning Harrods means nothing in the world of business. Companies that perform and have a collective of intelligent people running them means a whole lot more.

Happy Investing!

Damian