n 2007, when Indian Hotels Group first made an offer for a strategic alliance with Orient-Express Hotels (OEH), the latter was valued at $65 a share.

Yesterday, Indian Hotels Group made an offer for OEH at $12.63 a share. Given the steep drop in the offer price, why did the Indian Hotels stock tank 5 per cent on Friday?

Two factors seem to be at play. First, the sheer size of the deal (the $1.86-billion bid is 1.34 times Indian Hotels market value), which makes it risky for the company. Indian Hotels has indicated that the deal will be funded by $650 million in cash, $100 million from the Montezemolo family, leaving $1.1 billion (Rs 5,883 crore) to be funded by debt from the Indian Hotels/Tata Group.

Indian Hotels carries net debt of Rs 3,850 crore in its consolidated balance-sheet.

Assuming the deal is to be funded only by Indian Hotels, the addition of the above debt can substantially skew the debt-equity ratio which stands at a manageable 1.3.

Even if funded by overseas loans, the interest burden would go up. Its interest costs in 2011-12 were Rs 213 crore. Even at 5 per cent a year, the interest costs on $1 billion debt would work out to about Rs 265 crore.

Second, OEH’s dependence on the European and North American markets add to uncertainties from the deal. OEH gets 70 per cent of its revenues from European and North American markets. As a luxury chain, OEH has been facing pressure due to the cutback in discretionary spending in its home markets. It reported a net loss of $84 million last year.

However, OEH prospects can brighten if the home markets recover from the current slump. According to Bloomberg estimates by analysts tracking the firm, OEH is expected to turn in a profit of $7 million for 2012-13.

shaurya.mishra@thehindu.co.in

(This article was published on October 19, 2012)
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