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BL Research Bureau

Indian Hotels has made yet another overseas foray with its latest acquisition of a 10 per cent stake in NYSE-listed Orient Express Hotels. But this move, which involves buying into a company, is a departure from Indian Hotels’ earlier acquisitions, which have involved buying out marquee hotel properties in “gateway” destinations such as New York, Boston and San Francisco.

The Taj group chain acquired a Ritz Carlton Property in Boston for $170 million in January 2007 and the Campton Place in San Francisco for $60 million in April 2007. The latest acquisition is its biggest yet as well as among the more expensive, at $211 million (about Rs 850 crore).

The shares were acquired through the open market. The acquisition was funded by loans from the promoter group, which carry an annual interest rate of 6.25 per cent. With the acquisition of a stake in the company, the Taj Group chain hopes to gain access to the 39 hotels and 6 luxury tourist train services managed by Orient Express. In its filings with the Securities and Exchange Commission, Indian Hotels has stated that the buy is intended to signal its seriousness to pursue an alliance with the Orient Express.

In a letter to the Chairman of Orient Express, Indian Hotels has also expressed its intention of pursuing such an alliance and has also hinted that it could further increase its stake in the company.

This seems to suggest that Indian Hotels’ interest in Orient Express may extend beyond a mere marketing alliance along the lines that it entered with Japan-based Okura group of hotels. Orient Express Hotels reported revenues of $500 million and profits of $40 million in 2006.

Its market capitalisation of over $2 billion appears to reflect the value of its real estate holdings and its own recent foray into development of hotel properties.

Indian Hotels’ increasingly aggressive overseas expansion, growing leverage to fund these buys, impending equity dilution from the rights offer and lack of clarity on the returns from these acquisitions could act as a potential drag on the valuation of the stock in the near term.

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