Mukesh Ambani led Reliance Industries said that its wholly owned subsidiary, Reliance Industries Investment and Holding Private Limited, has picked 14.12% stake in EHI Ltd, the hospitality firm that operates the luxury hotel chain Oberoi (that incidentally also has investments from AIM-listed India focused PE firm Elephant Capital) from promoters for Rs 1,021 crore. The EIH shares went up by 11.46% to close at Rs 150.7 on Monday in BSE.
The deal translates into a value of around Rs 184 per share. This is despite the fact that RIL arm has picked a stake thats just short of the trigger point for making an open offer (15%). The transaction values EIH Ltd at Rs 7,230 crore or $1.54 billion.
This is just marginally short of the market cap of the country’s largest hotel firm Indian Hotels (Rs 7,500 crore) that runs the Taj group of hotels under the Tata banner.
As of June 30, promoters held 46% in EIH Ltd that will come down to 32% post the transaction that will mean Oberois will continue to be the single largest shareholder of the firm.
There are more parties interested in a larger pie of EIH Ltd. Arch rival ITC that runs its Welcome group of hotels owns 14.98% in EIH Ltd. Although in the past it had said this is just a financial investment as a part of its treasury operation, it was reportedly keen on biting a larger pie of the stake as it looks at ways and means to diversify its business beyond cigarettes. Max India chief Analjit Singh was also in the fray and was in an advanced stake of negotiations to become a co-promoter of EIH Ltd but that deal did not progress.
PTI quoted Oberoi Group Chairman PRS Oberoi saying, "RIL desired to make a long term financial investment in the luxury hospitality industry. We are happy to encourage their investment in EIH Ltd. There is no change to control, management or operation of EIH." Asked about ITC increasing stake in EIH through open market purchases, he said: "If somebody wants, we can't stop people buying from the stock market." Financial investors hold 15.75% stake in EIH, with Life Insurance Corporation of India holds 6.36%.
An analyst with a brokerage firm said, "Though the motive behind EIH stake sale is not yet clear, most probably the promoters' plans to block a takeover threat by ITC will be the reason. Especially, as PRS Oberoi reiterated in last AGM that the company will not dilute further stake. However, the valuation given by RIL will keep EIH's market cap at Rs 7,000 crore, which is very higher than its present market cap." We cant say whether this is right valuation which may give a boost to hotel industry or an unreasonable one which may be hyped, he added.
"RIL’s investment in EIH Limited has been made as the Oberoi family had developed the “Oberoi Hotels” brand into a premier international brand in the luxury hospitality sector and as a result EIH Limited has excellent future prospects. RIL has full faith in and would support the management of EIH Limited and there is no change of management, operation or control of EIH Limited," said an RIL statement.
The major hotels owned and managed by East India Hotels (EIH) include The Oberoi-Mumbai, The Oberoi-New Delhi, The Oberoi-Bangalore, The Oberoi Grand-Kolkata, Trident-Mumbai and The Oberoi Udaivilas-Udaipur. EIH Ltd has a revenue of Rs 900 crore for FY09-10.
According to a recent report in Reuters, EIH plans to invest Rs 150 crore over the next two years on new projects, quoting S.S. Mukherji, vice chairman. It is looking at locations like London, Paris, New York, Shanghai, Beijing and Bangkok, mostly for management control of existing and upcoming properties, the report said. The hotel chain manages 32 properties globally.