Mumbai/Kolkata: Prithvi Raj Singh Oberoi, chairman of EIH Ltd —which runs India’s second biggest hotel chain—announced on Monday that he and his family had sold 55.4 million shares, a 14.12% stake in the company, to an investment arm of Reliance Industries Ltd (RIL), for Rs1,021 crore.
The move came six days after Oberoi indicated at a press conference in Kolkata that his son Vikram Oberoi and nephew Arjun Oberoi, both joint managing directors of EIH, might not work together after him.
RIL arm Reliance Industries Investment and Holding Pvt. Ltd paid Rs184 a share, 22% higher than EIH’s closing price on Monday.
The transaction, which won’t lead to any change in management control, gives P.R.S. Oberoi the financial strength to thwart any takeover bid by cigarette and consumer goods maker ITC Ltd, which has amassed a 14.98% stake in EIH.
“We are happy to encourage their (Reliance’s) investment,” P.R.S. Oberoi said in a media statement, while RIL said “it has full faith in and would support the management of EIH”.
To be sure, ITC chairman Y.C. Deveshwar has maintained for the last 10 years that his company would not make a hostile bid to seize control of EIH, and has stopped buying shares from the market. Indian takeover laws would have forced ITC to make an open offer for at least 20% more if its stake in EIH exceeded 15%.
ITC refused to comment on the share sale by the Oberoi family.
“ITC will not challenge the financial muscle of RIL,” said Himani Singh, an analyst at the Mumbai office of UK-based Elara Capital Plc.
Spurred by Monday’s announcement, EIH’s shares jumped Rs15.50, or 11.46%, to close at Rs150.70 apiece on the Bombay Stock Exchange, while the bourse’s benchmark Sensex index closed 33.70 points, or 0.19%, higher at 18,032.11.
The share sale to RIL values EIH at around Rs2.4 crore per room, or “near peak”, according to Elara’s Singh.
Besides P.R.S. Oberoi, who held 2.2 million shares of EIH as of 30 June, the sellers to RIL were Aravali Polymers Llp and the Oberoi family’s main holding company Oberoi Hotels Pvt. Ltd. The share sale pared the Oberoi family’s holding in EIH to 32.31%.
“We have been approached regularly by many people with different interests,” P.R.S. Oberoi said. “However, in each case, the investment objectives of the various parties were not compatible with our objectives.”
A year ago, the Oberoi family had tried to bring in Analjit Singh, chairman of diversified conglomerate Max India Ltd, as a white knight through a similar share sale, but talks fell through.
EIH needed a white knight, according to Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd. “RIL is among the few companies in India that EIH could have brought in to thwart any unsolicited bid by ITC,” he said.
Though EIH wishes to remain asset-light, it needs a lot of cash even for maintenance of its properties, according to another analyst, who did not want to be identified.
“The hospitality business is very capital intensive,” P.R.S. Oberoi said. “EIH has a growth strategy and it needs strong committed shareholders to support the company in the long term.”
RIL, which according to a Goldman Sachs estimate, is likely to generate $18 billion (Rs.84,240 crore) in cash between 2011 and 2014, recently said it was looking to enter new businesses such as power, telecom, healthcare and hospitality.
It has joined hands with Mumbai-based real estate developer Maker Builders to construct hotels in the city, including two at the Bandra-Kurla Complex, which could together cost Rs1,200 crore.
The deal with the Oberoi family gives RIL a partner that has vast experience in running hotels, Kejriwal said.
The Ambanis and Reliance are not new to such a role.
In the early 1990s, group founder Dhirubhai Ambani had acted as a white knight to help ward off a takeover threat faced by engineering and construction conglomerate Larsen and Toubro Ltd (L&T) from the late Manu Chhabria, who then retreated from the race. That allowed the Ambanis enough room to mount a raid of their own on L&T, with the help of the government; a move that was stymied when a new government took over at the Centre. In 2002, Reliance sold its stake to the Aditya Birla Group, resulting in another fight over the engineering firm that ended when L&T hived off its cement business and sold it to the Aditya Birla Group.
The EIH deal puts Mukesh Ambani in an unaccustomed role, that of a financial investor without management control, said an investment banker, who has advised RIL on several transactions and did not want to be identified.
Ambani, known for entering sectors that were completely new to the group such as retail and special economic zones (SEZs), is taking a bet on India’s economic growth leading to a surge in travellers to the country.
In 2009, the World Travel and Tourism Council had estimated travel and tourism demand in India would grow at 8.2% a year till 2019, which led many companies to announce expansions and start-up plans. In 2007, Crisil Ltd estimated that almost 15,000 five-star rooms would be added in 2010 and 2011. It subsequently scaled this back to 6,200 rooms this year.
Room supply growth has slowed because of the slump following the global financial crisis, regulatory and construction delays, high real estate prices, and lack of easy bank credit, Manoj Bahety and Manav Vijay, analysts with brokerage Edelweiss Capital Markets Ltd, wrote in a 1 April report.
Apart from the deal with Maker Builders, Ambani also has plans to build hotels in SEZs he is establishing in Mumbai, Haryana and Gujarat.