Mumbai: The Tata group’s Indian Hotels Co. Ltd (IHCL) is making another bid to take over Orient-Express Hotels Ltd, which runs a chain of luxury hotels around the world, after being rebuffed five years ago.

On Thursday, the firm said it along with Charme II Fund, an Italian fund managed by Montezemolo and Partners SpA, sent a letter to Orient-Express Hotels proposing to purchase all outstanding shares of Orient-Express’s Class A common stock for $12.63 per share in cash.

The proposal is valued at approximately $1.86 billion, including Orient-Express’s net debt, IHCL said in a media statement.

The all-cash offer represents a 40% premium to Orient-Express’s closing stock price on 17 October, the last trading day prior to this announcement, a 45.2% premium to Orient-Express’s 10 trading day average of closing stock prices, and a premium to the 52-week closing high of $10.9 per share.

Indian hotel chains have been keen on global acquisitions as valuations in markets such as the US and Europe have declined since the financial crisis and the ongoing slowdown. Acquisitions make sense for companies with the cash, offering them a direct presence in a new market, experts said.

Recently, the Sahara group bought New York’s iconic Plaza Hotel for $570 million. In December 2010, it bought the landmark Grosvenor House hotel in London from Royal Bank of Scotland Group Plc for $726 million. IHCL, which runs the Taj group of hotels, has also bought hotels overseas in the recent past.

Orient-Express, which is based in Hamilton, Bermuda, owns and runs around 50 hotels, including an iconic one at Machu Pichu in Peru.

Its stock, which touched a high of $64.80 on 31 October 2007, has lost around 80% since, most of it in 2008 in the wake of the financial crisis. It was trading at $12.02, up 33.26% following the IHCL bid, at 9.10pm India time on Thursday. The 2007 high coincides with the rejection of IHCL’s bid for an alliance. Around the same time, Orient-Express rejected a $2.55 billion offer from a Dubai government arm.

Then, IHCL and Orient-Express were involved in a spat over their respective brand positioning and image. Orient-Express had dismissed IHCL’s investment as value destructive. The Tata group retorted that Orient-Express’s board wasn’t meeting the needs of its shareholders.

The Indian company has been a shareholder of Orient-Express for more than five years and currently holds approximately 7% of its Class A stock.

Shares of IHCL rose 3.24% to close at 70.20 per share on Thursday on BSE, while the benchmark index, the Sensex, gained 0.97% to end at 18,791.93 points. The bid was announced after markets closed in India.

IHCL has filed its proposal letter with the US Securities and Exchange Commission in line with the rules that require the company to publicly disclose its offer.

“Indian Hotels has great respect for Orient-Express and its collection of unique luxury hotel properties around the world, and we are very excited at the prospect of bringing the two great companies and brands together," said R.K. Krishna Kumar, vice-chairman of IHCL. “We believe this premium, all-cash offer represents a compelling and immediate value proposition for Orient-Express’s shareholders, and provides Orient-Express with access to the additional capital necessary to preserve its properties and heritage while potentially expanding its footprint."

If the deal goes through, it will be a significant development for IHCL, said Vivek Nair, vice-chairman and managing director of rival hotel chain Hotel Leela Venture Ltd.

“Indian Hotels will have secured iconic properties across the world, including several markets in which the company was trying to establish its presence," Nair said.

The Tata company has secured the requisite capital for the transaction, including debt financing, from Bank of America NA, ICICI Bank Ltd and Standard Chartered Bank. IHCL also has an agreement in place with Charme II Fund to invest $100 million for a minority stake in the combined company.

The Charme II Fund managed by Montezemolo and Partners makes investments in leading companies with strong ties to Italy. Montezemolo and Partners is the family investment vehicle of Luca di Montezemolo, chairman of Ferrari and a close personal friend of Ratan Tata, the chairman of Tata Sons Ltd. Tata and di Montezemolo are also directors on the board of Fiat SpA, which owns Ferrari and used to have a tie-up with Tata Motors.

“While we would have preferred to negotiate confidentially with Orient-Express, US securities laws required public disclosure of our proposal. However, we are prepared to devote all necessary resources to expeditiously complete due diligence," Kumar of IHCL said.

Spokespersons for IHCL and the Italian fund clarified that Orient-Express would remain an independent and autonomous company with its own board of directors.

While Bank of America-Merrill Lynch is the sole financial adviser, Shearman and Sterling Llp is serving as legal adviser, and Hotel Advisor (UK) Ltd is providing industry expertise for the proposed transaction to IHCL.

The purchase won’t have a positive impact in terms of revenue in the short term for IHCL considering the demand slowdown across the global hospitality sector, said Rashesh Shah, a senior analyst at domestic brokerage firm ICICI Securities Ltd.

“But this strategic buyout will pay off for Indian Hotels in the long term if they are getting assets cheaper," Shah added.

“Orient Express is a brand with a great deal of heritage and history behind it, but its brand is no longer quite as strong as the company’s executives think it is. it is understandable that Orient-Express executives want to protect their brand and position, but they should examine this bid a little more realistically and look for possible synergies, rather than just dismissing it out of hand. They should look at the performance improvements at Jaguar Land Rover following the Tata Motors takeover, and take note," said Morgan Witzel, who authored Tata: The Evolution of a Corporate Brand.

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