Unlocking value. ITC approves demerger of hotels business

Ending months of speculation, diversified conglomerate ITC Ltd on Monday said its board has accorded in-principle approval to demerge the hotels business. Under the scheme of arrangement, ITC will hold a stake of about 40 per cent in the new entity and the balance 60 per cent will be held directly by its shareholders proportionate to their shareholding in the company.

The board has approved incorporation of a wholly owned subsidiary, to be named ITC Hotels Ltd or such other name as may be approved by the Ministry of Corporate Affairs so as to progress with the proposed reorganisation.

After the announcement, the company’s stock plummeted to a low of ₹468 — a decline of over four per cent from its previous close. However, it managed to recover slightly and ended the day at ₹470.90 — down by 3.87 per cent on the BSE on Monday.

In an exclusive conversation with businessline earlier in May this year, ITC Chairman Sanjiv Puri had said the company was thinking of an “alternative business structure” for its hotel business, and with a strong recovery in the hotel industry, the proposal to demerge was “back on the table”.

Hotels business matured over years

The company’s board, at its meeting held on Monday, evaluated and discussed various alternative structures for the hotel’s business towards crafting the next growth horizon and enhancing value creation for all stakeholders. It noted that the hotels business has “matured over the years” and is well poised to chart its growth path as a separate entity in the fast-growing hospitality industry with a sharper focus on the business and an optimal capital structure, whilst continuing to leverage ITC’s institutional strengths, brand equity and goodwill, the company said in a press statement.

ITC currently has over 120 hotels and 11,600 keys across over 70 locations. 

“The proposed demerger of the hotels business is testament to the company’s commitment to creating sustained value for stakeholders. Creation of a hospitality focused entity will engender the next horizon of growth and value creation by harnessing the exciting opportunities in the Indian hospitality industry. In the proposed reorganisation, both ITC and the new entity will continue to benefit from institutional synergies,” Sanjiv Puri, ITC chairman said in the statement.  

Also read: ITC’s hotel biz demerger: Room to grow for investors?

The proposed reorganisation would ensure continued interest of ITC in the hospitality business, provide long-term stability and strategic support to the new entity in its pursuit of accelerating growth and sustained value creation as also enable leveraging of cross synergies between the company and the new entity.

Sharper capital allocation

The move reinforces the sharper capital allocation policy manifest in the asset-right strategy outlined in ITC Next, sources said.

The demerger will help the new entity in attracting appropriate investors and strategic partners/collaborations whose investment strategies and risk profiles are aligned more sharply with the hospitality industry.

Details of the proposed reorganisation, including the scheme of arrangement, would be placed for approval of the board at its meeting to be convened on August 14.

According to Abneesh Roy, Executive Director & Head of Research Committee, Nuvama Institutional Equities, the demerged unit will need approvals and will eventually get listed in stock exchanges in 12-18 months.

“The 40 per cent stake which ITC will continue to hold post the listing is a healthy balance between getting enough freedom and also ensuring that the hotels business continues to get institutional synergies from the bigger entity,” he said.

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