EIH rights issue key to Ambani’s game plan7 min read . Updated: 21 Sep 2010, 11:41 PM IST
EIH rights issue key to Ambani’s game plan
Mumbai: The board of EIH Ltd, which runs India’s second largest hotel chain, will meet in Bangalore on Thursday to decide on a rights issue, but analysts have their sights set on Maker Chambers IV in Nariman Point, Mumbai’s business district. That’s the head office of Mukesh Ambani’s Reliance Industries Ltd (RIL).
Analysts want to know if RIL will merely subscribe to its entitlement in the rights issue or buy more shares if ITC Ltd and a few other shareholders decide not to partake in the offer.
RIL bought a 14.8% stake from the promoters of EIH last month, a move many believed was intended to ward off any potential takeover bid by ITC, which runs hotels besides being a maker of cigarettes and consumer goods. ITC holds a 14.98% stake in EIH.
Ambani’s decision to buy the stake in EIH befuddled many analysts, who are now closely watching his next step.
To be sure, Ambani was not the first choice of the Oberois, the promoters of EIH, as a white knight.
EIH had first approached Analjit Singh, the promoter of Max India Ltd and a long-term partner, but Singh could not raise funds from private equity firms to finance the purchase and the deal was called off last year. Max India declined to comment on the issue.
Singh still holds a 4% stake in EIH. A spokesperson for Max India confirmed that he has been looking to sell his stake.
Why did the cricket-loving owner of RIL, India’s most valuable company with interests in oil refining, petrochemicals and organized retail, invest a little over 1,000 crore in EIH? After all, there are hardly any synergies between the two groups.
Kannan Ramaswamy, the William D. Hacker Chair Professor of Management at US-based Thunderbird School of Global Management, is not surprised by RIL’s move into the hospitality sector but has many questions.
“Historically, Reliance in their annual general meetings (AGMs) has been very clear on how they are going to roll out their growth and diversification strategies..," he said.
“At the last AGM, Mukesh did mention about doubling the enterprise value of the group, but there was hardly any detail on how the group will go about it. There was some reference to retail and telecom but...the meeting was surprisingly short on details. Although the quest for growth remains as strong as ever, the plans have still not crystallized," he says.
A senior consultant who in the past had advised both groups compares RIL’s investment in EIH to Mexican telecom billionaire Carlos Slim buying a 6.4% stake in The New York Times Co. in 2008. The consultant didn’t want to be named.
It’s an “emotional investment" as Ambani had approached the Oberois, the promoters of EIH, three years ago with a plan to buy the company, say three people claiming to be in the know of this development.
According to Ramaswamy, RIL’s investment strategy mirrors that of the SK Group of South Korea.
“Like Reliance, SK Group’s main line of business is oil and gas. Before Jamnagar 2, SK had the largest refinery plant in a single location, globally. But like Reliance, they too moved into telecom and later into hospitality and life sciences," he said.
In the two weeks since RIL bought the EIH stake, Mint has spoken to many people close to the deal for a glimpse of the behind-the-scenes happenings. Most of them declined to be identified, but say they see logic in Ambani’s gamble.
The theories going around are:
Taking the Oberoi brand overseas: “He (Mukesh) likes the brand. He wants to take the brand global," says an executive who worked on the deal from the RIL side. Why would it need to take it overseas when there is so much demand in the country?
Ajoy K. Misra, senior vice-president of sales and marketing at the Taj Group of Hotels, has the answer. Taj had to go overseas as “you cannot survive" otherwise, says Misra. “Sooner than later, the international brands will enter, bring in the enormous muscle and the loyalty programmes and your home dominance gets affected."
“You need to think big. Source markets are from where our customers are coming. Our statistics show that (most of) our business comes from US and UK is No. 2 (in terms of sourcing guests)."
EIH doesn’t have a presence in any of the ‘source markets. It needs money to acquire properties in these countries and RIL can help it establish a brand overseas.
“It (the Oberoi brand) offers RIL a great platform to grow and leverage the brand," says Paresh Vaish, managing director, Alvarez and Marsal India Pvt. Ltd, the Indian affiliate of a global management consultancy firm.
Burgeoning cash flows: RIL’s challenge in the coming years will be to deploy the $7.5-8 billion excess cash it generates from its bread-and-butter business of refining and petrochemicals.
“When a company has a lot of cash, it can either return it to investors or invest in the business itself. The decision to buy a piece of EIH is another way of deploying the money. Yes, they could have returned the money to the shareholders in the form of dividends but RIL investors are typically a very happy bunch already and therefore perhaps management thought the better of it," says Ramaswamy.
Asset-light approach: RIL owning properties and Oberois managing the properties suggests a mutually beneficial partnership as most hoteliers are opting for for an “asset-light" model.
“Oberois’ expertise lies in hotel management. They should focus on their strength," says Vikram Hoon, a former executive at EIH.
“There was always a chance that some hotelier increasing its stake would have meant that Oberoi brand was always under a threat. RIL has too many other projects to focus on rather than taking over the management and running the show," says a person who worked with the Oberois on the deal. “I think he has his own plans (in hospitality). He will let Oberoi manage those properties," he added.
RIL has some properties in Mumbai which could see hotels coming up. “Undoubtedly, he will set up his hotels and ask the Oberoi to manage them," says another executive who advised the Oberois on the stake sale to RIL.
Reliance shareholders, however, did not cheer the deal; RIL shares dropped 3% on the day it was announced.
Most successful hotels are founded by great personalities, says a promoter of a midsize hotel. Prithvi Raj Singh or PRS Oberoi, an octogenraian known to his close acolytes as Biki, is the face of the Indian hospitality industry and a quintessential hotelier.
His father, Rai Bahadur Mohan Singh Oberoi, put the Indian hospitality industry on the world map when he opened hotels in Egypt, Bali and Sri Lanka.
PRS came late to the centrestage as his father and flamboyant brother Tiki Oberoi were holding the reins of the company. Oberoi senior was a man who liked wielding full control, but knew well that PRS would be the heir apparent to take forward the Oberoi legacy. An alumni of Ecole Hoteliere, the Swiss institution that churns out world-class hotel managers, PRS was more global than his father in his outlook.
Among his initial triumphs was a venture into Pakistan, helped by his friend Zulfiqar Ali Bhutto, who invited him and Piloo Mody, a member of the Rajya Sabha, to shoot gamebirds on his estate in Larkana. The venture came to naught; after the India-Pakistan war of 1971, the Oberoi properties were usurped by the Pakistanis.
PRS’ major success came when his father decided to build another hotel in the vicinity of the existing Oberoi hotel at Nariman Point when Air India’s headquarters in the vicinity emerged a bit taller than the Oberoi property.
PRS was initially surprised at it would mean huge borrowings from banks and the group had just built a marquee edifice, but flung himself into the project that would become his signature hotel—The Oberoi.
“Ambani is a game-changer," says an executive who worked closely with him for five years. “He focuses on one or two businesses at one time. He might start other business but lets them grow at their own pace."
“Currently, shale gas and telecom are two things central to his thinking," says the executive who left RIL sometime ago. “Since, hospitality does not give him much space to scale up, I doubt whether he would like to get into for now."
“I am not a betting person but if I have to bet I would not bet on Reliance getting into hospitality as another core line of business activity similar to petrochemicals," says Ramaswamy. “Also, I don’t think they have what it takes to launch Oberoi Group meaningfully on the global stage," the professor says, arguing that the group in the past has failed to globalize its core petroleum business.