Shares of Indian Hotels dropped 5.5% on Friday after it announced an ambitious hostile bid to acquire global luxury chain Orient-Express Hotels on concerns that it would have to borrow a huge sum, probably more than the company's current market value, to finance the deal when it was already facing a debt burden.
Indian Hotels, the Tata Group's hospitality arm, in a statement to the Bombay Stock Exchange said it has launched a bid to acquire 100% in the New York Stock Exchange-listed Orient-Express along with Charme II fund managed by Montezemolo and Partners, run by the chairman of luxury car firm Ferrari, Luca Cordero di Montezemolo. Indian Hotels currently owns 7% in Orient-Express.
The association marks a new high for the Tata group's overseas ambitions in hospitality which suffered a jolt earlier when Orient-Express turned down a partnership offer from Indian Hotels, questioning its credentials.
The acquisition proposal is valued around $1.8 billion (around Rs. 9,700 crore) including the debt of Orient-Express. The stock price of Orient Express was up by 22.51% at $11.05 on Friday.
Orient-Express said the offer by Indian Hotels was unsolicited and it would evaluate the proposal and respond accordingly. Indian Hotels said it expected Orient-Express would respond to its joint proposal within the next three weeks.
Orient-Express owns a global portfolio of properties including the Hotel Cipriani in Venice and the 21 Club in New York, but its growth has been hit by the sluggish European economy. It had rebuffed Indian Hotels in 2007, and again in August.
While Indian Hotels has said that it would raise the capital required for the acquisition through a combination of debt and equity, industry experts were sceptical. "At the current valuations, the company may not opt to raise the capital through equity but debt. Investors looking at a three-year horizon may be in for a disappointment," said P Phani Sekhar, fund manager-PMS, Angel Broking.
As on March 31, Indian Hotels had a debt of Rs. 2,680 crore. The Tata group holds 37.53% stakes in Indian Hotels valued at Rs. 2,010 crore as on Friday with the market capitalisation at Rs. 5,357 crore.