Hostile takeover bids are rare in India but its entrepreneurs are not loath to fight a pitched battle in international markets. The Tata group’s acquisition of a 10% stake in Orient-Express Hotels through Indian Hotels seems to be more than just an investment.
SEC Filings (Will India ever get to these levels of disclosures?) show that the Tata Group had approached the company management weeks before this announcement. They wanted to explore the possibility of, among other things, ‘a unique business combination arrangement’ that would work to both parties’ advantage. That is nothing but a polite way of telling a company it is being wooed.
Read this extract from Tata’s SEC filings: “Indian Hotels, through its wholly-owned subsidiary Samsara, acquired the Shares as a reflection of its deep commitment to the possibility of an association with the Company. Following the proposed dialogue with the Company, Indian Hotels and Samsara would seek to review their investment in the Company on a regular basis and, as a result thereof, may at any time and from time to time determine, either alone or as part of a group,
(a) to acquire additional Shares in the Company;
(b) to dispose of all or a portion of the Shares owned by them; or
(c) to take any other available course of action, which could involve one or more of the types of transactions or have one or more of the results specified in Items 4(a) through (j) of Schedule 13D.”
Orient-Express has a strong response, refusing to pursue proposals for discussion contained in Tata’s letter. Paul M White, president & CEO, says that RK Krishna Kumar, vice-chairman, Indian Hotels, is welcome to meet him at a mutually convenient time, since his company is a shareholder. But his board has decided not to pursue the proposals mentioned in his letter, and he would not hence wish to discuss them. Interesting, but this response does not have to be the final word, and the Tata group can now claim to be master of the game, having tackled Corus.
As a parting shot, Mr White’s letter says: “The Orient-Express Hotels portfolio of hotels and other travel related services is aimed specifically at the top end of the luxury travel market, and the company believes its future growth plans should continue to focus on this segment as an independent company.” Are they implying that the Tata group is not exactly capable of dealing with the top end of the luxury market?
Orient-Express earned $510.5mn (Rs 2,042 crore) in the year ended December 2006, a growth of 14%, and earned a net profit of $39.8mn (Rs 159 crore), down 4%. EBIDTA grew by 27.7%, indicating that its business is in fine form, but a sharp increase in interest costs, forex-related losses and a near doubling in tax led to the fall in profit. It had acquired 7 hotels in 2006. Its biggest market by revenue is Europe with rest of the world also accounting for a big chunk. It has a market cap of $3.2bn (Rs 12,800 crore) which means it trades at 6 times sales. It also has debt of about $600mn (Rs 2,400 crore). It does seem outrageously priced though, with a P/E multiple of 51 times.
But Orient-Express’ capital structure will not make it very easy for the Tata group to make a hostile bid, and even increase the cost of acquisition. More details can be found in its 10-K filing, which details the Class A and Class B share structure, the poison pill provisions in its memorandum of association, and Orient-Express Holdings’ stake in the company. Page 125 of that document seems to indicate that Orient-Express Holdings (controlled by James Sherwood, Messrs Campbell and two others) has a combined (Class A and Class B) voting power of 81%.
That may make a hostile takeover bid impossible in theory, but the powerful hand of Financial Institutions who hold significant stakes, may make it difficult in practice to ward off a bidder who is willing to cough up a hefty price for their stake. But what seems certain is that the Tata group will have to pay a much higher price than what it has paid for the initial 10% stake. This is just the beginning of what may just turn out to be another battle fought across continents. Will be fun to watch.