Orient Express: Tatas can check out but never leave

Ratan Tata is set to hang up his boots by this year end. After two decades at the helm of the Tata conglomerate, which saw some audacious and successful takeovers of companies across the globe, Tata wants to add one more to that list by checking into Orient-Express Hotels.

Friendly overtures have been made, thrice over, but the Chairman of the Tata group, of which the Indian hotels chain is a unit, has been snubbed each time.

Though keen to expand his global hospitality footprint from the current 115 properties that Indian Hotels boasts of, and despite the fact that its $1.8-billion bid has been turned down, Tata will stick strictly to the straight and narrow.

Danny Farrugia of Aequus Counsel notes that is by far, the best way ahead. The Australia-based company is a legal and corporate adviser with significant expertise in cross border transactions in the hospitality industry. Farrugia has been keeping an eagle eye on the deal.

Speaking to Business Line , Farrugia emphasised that any acquisition of or a merger with Orient-Express Hotels (OEH) can only be a friendly one, given the unusual capital and ownership structure of OEH. An OEH subsidiary owns the majority of voting shares in OEH.

“In order for the now rejected takeover offer made by Indian Hotels Company Ltd for OEH, or indeed any other takeover offer to be successful, it would require the support of the OEH Board of Directors,” says Farrugia.Stating that the law of Bermuda, where OEH is based, permits a subsidiary to hold and vote shares in its parent, he adds that Indian Hotels would need to pay heed to the fact that three investment fund shareholders in OEH had already recently tested the OEH ownership structure and the law of Bermuda, and failed dismally.

For parties that seek to do otherwise, Farrugia has one simple answer: expect to find themselves before the Supreme Court of Bermuda seeking to make a new law.

A prospect that is not included in the path that Tata is treading.

International footprint

The Indian Hotels Company, the iconic brand of Indian hospitality, has been seeking exotic and luxurious offerings to add to its portfolio of destinations.

New countries, experiences and new customers – all have been coming together under its ever-growing canopy, with spas, safaris and luxury yachts as part of the service.

Indian Hotels officials say the strategy overseas is to selectively enter key gateway cities around the world, with the company seeking opportunities only in the high-end luxury segment.

A probable OEH acquisition would tie in the transition with a nice little bow.

OEH, which is listed in New York, has a strong Italian soul, given that Italy hosts the chain's most prestigious and lucrative hotels: from Cipriani in Venice, the Villa San Michele in Florence, the Splendido in Portofino at Caruso Ravello to the Timaeus of Taormina.

It is for this reason that Indian Hotels has chosen to engage an Italian partner, the Charme II Fund, which was established by the Montezemolo family, and is managed by Montezemolo and Partners S.p.A.

The fund makes investments in leading companies with strong ties to Italy.

Although Indian Hotels inaugurated a Taj hotel in Morocco recently and signed some management contracts in China, the group’s international business has not been particularly spectacular.

Boarding the OEH is expected to help hedge its risk in India, where Indian Hotels currently earns more than 70 per cent of its turnover.

High debt

Though OEH would be a feather in the cap, Indian Hotels, the jewel in the crown, has been posting net losses for the last four quarters.

For the July-September quarter, it reported a net loss of Rs 67.82 crore on net sales of Rs 813.80 crore, as operating costs and tax provisions surged.

The consolidated debt of Indian Hotels stood at Rs 3,800 crore with the company saying it is comfortable with it and has no plans to retire the debt.Indian Hotels’ $1.8-billion offer (approximately Rs 9,900 crore) includes taking over OEH's debt, which stood at $529.5 million (Rs 2,800 crore) as of June 30.

The US-based luxury hotel chain has been divesting non-core assets to help reduce debt and increase liquidity.

As an official said, OEH's ungracious refusal of Indian Hotels’ friendly gesture, at a 40 per cent premium to the prevailing share price of OEH, falls in the face of the ongoing Euro zone economic crisis, which has crimped demand for luxury travel as well as revenue at OEH.

The global economic uncertainty and its impact on the hotel industry and on the luxury sector in particular, came up for discussion at the OEH's Q3 earnings call, with Philip Mengel, interim CEO, allaying fears on its debt .

Analysts, however, noted that OEH has been hurting for some time, and that its high debt has stymied plans to accelerate investments to help maximise returns.

Indian Hotels, on the other hand, has been strong on acquisitions, and had earlier pocketed New York’s The Pierre and Campton Place in San Francisco.

Generating returns is another story altogether.

A $100-million renovation package over and above the acquisition price for the luxurious The Pierre on NY's Fifth Avenue, has not yet brought in returns.

Ditto with another investment of $228 million to acquire Boston's Ritz-Carlton and Campton Place in San Francisco. A recent Morgan Stanley report also highlighted how the US properties, especially The Pierre, have been a drag on revenues.

Last year, both The Pierre and Campton Place, among other properties, registered the sixth straight year of negative performance.

Assuaging misgivings

When Indian Hotels bought a 10 per cent stake in OEH for the first time in 2007, for an estimated $211.28 million through Samsara Properties, Tata's ambition was to create a strategic alliance that would aim “at leveraging global networks and build brand equity for both companies in a unique relationship.”

Even at that time he tried to allay misgivings about the takeover.

He had assuaged shareholders’ concern at the AGM of the Indian Hotels company, on the investment that had seen significant erosion in value two years later. Cut to October 18, 2012. There are no deflections in Indian Hotels’ offer letter, with the company again assuaging fears about a hostile bid.

Despite the fact that the Tatas have tried, time and again, to allay all misgivings about the takeover and tried to push their credentials as a responsible group wedded to the highest principles of corporate governance, rumours of a counter offer refuse to die down.

Counter bid

As of now, Indian Hotels has a 7 per cent holding in OEH, behind investment firm Cohen and Steers Capital Management, which is the largest shareholder with a 13 per cent share.

In an October 2012 investment commentary, Cohen and Steers has said that although the unsolicited bid from Indian conglomerate Tata Group was recently rejected, “we believe there is potential for a transaction.”

Stating that the company had “an out-of-index allocation to OEH, which was a strong performer in the wake of news of its potential acquisition,” the largest shareholder earlier had suggested that OEH should entertain better offers.

Recently, on OEH facing pressure to open up for sale, Joseph Harvey, Chief Investment Officer of Cohen and Steers said, “The company should pursue a process to find out what it's worth.”

He had earlier said OEH was worth around $18 a share.

Bidders Indian Hotels had offered $12.63 for an OEH share, confident in the fact that they had already reached an agreement with James Sherwood, founder of Orient Express.

For now, Indian Hotels could be looking to raise the offer a pinch.

With the OEH buy, the group’s hospitality bandwidth is bound to get stronger over a period, as its scale of operations, both domestic and overseas, expand.

That is exactly what the group is now seeking and is “prepared to devote all necessary resources to mutually beneficial agreement.”

Or, will it be like those lines from that eternal Eagles Hit, Hotel California, “You can check-out any time you like, but you can never leave!”

Also read: >How Tata got Charme

> Amritanair.ghaswalla@thehindu.co.in

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