Taj still keen to run Orient-Express

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Management collaboration could work for both chains if takeover of marquee US hotel fails

You may not yet have heard the last of Ratan Tata’s by now legendary love for marquee New York hotel Orient-Express. The Tatas are looking to joint management with Orient-Express of each other’s properties after the latter rebuffed the former’s offer for equity buyout last week, a top Tata official has claimed, without wanting to be identified by name.

The official who works at IHCL told Financial Chronicle that his company was interested in a joint team of Orient-Express Hotels (OEH) and Indian Hotels Company (IHCL) officials managing and marketing the international properties of the Taj chain in the US, including Taj Boston, Campton Place and the Pierre, among others, in a strategic alliance that would also lead to Taj managers getting to work at Orient-Express.

This is the first time that the Tatas have offered their detailed reaction, albeit informally, to the Orient-Express rebuff made public late on Thursday, when reports from New York quoted a letter from OEH to Indian Hotels stating: “Your opportunistic proposal was made at a time when the price of Orient-Express shares has been significantly depressed…Our board has unanimously concluded that your proposal significantly undervalues Orient-Express, and that now would be a highly disadvantageous time to sell.”

The Tata official in the know said, OEH had left a door open for a possible non-equity deal with IHCL. He also claimed that the past acrimony, that characterised an earlier bid by Tatas in 2007 to buy a controlling stake in the firm, no longer exists.

The official claimed that with OEH showing receptiveness to work on a non-equity based partnership this time around, IHCL could look at developing “joint sales and marketing plans, strategic combined materials sourcing, interactive human resource initiatives, and a powerful combined IT architecture for the two companies’ international portfolio of luxury hotels and resorts”.

“The work on this is under way,” the official said.

Orient-Express operates luxury hotels, resorts and trains across the US, Asia Pacific and Europe.

According to details of communications between the two managements made known to FC, as late as August 2012, OEH had rejected a Taj offer when it felt that it was “deeply unattractive from a financial perspective,” OEH had said then that it “might be interested in exploring areas of collaboration, but had no interest in having IHCL make any additional equity investment in the company.

Subsequently on November 8, J Robert Lovejoy, chairman of the OEH board wrote to R K Krishna Kumar, vice-chairman of IHCL, stating, “The members of the Orient-Express board have great respect for your company.”

This is a marked about-turn from December 2007 when IHCL termed the response of the then OEH CEO to the takeover proposal as ‘pejorative, inaccurate and libellous’. At that time, Krishna Kumar had said, “We acted in the mistaken belief that your board recognised its fiduciary duties and would act in a responsible manner to begin a dialogue with us.”

On Friday (November 9), IHCL and Montezemolo & Partners on behalf of Charme II Fund said they were “reviewing the position taken by the Orient-Express board and considering their options with respect to their offer to acquire Orient-Express.”

One option is to increase the offer price of $12.63 per share offered by IHCL for the 93.1 per cent that it does not already own of OEH. But as IHCL has itself acknowledged in an October 18 communication to OEH, the offer price represents a ‘premium valuation based on multiples of cash flow in comparison to relevant comparable public companies and comparable M&A transactions over the last several years.” On Saturday, the OEH price was up 6.82 per cent to $11.27 per share on the New York Stock Exchange. At that price it was still 12 per cent lower than the price offered by IHCL.

“After thorough consideration, and in consultation with independent financial and legal advisors, our board of directors has unanimously concluded that your proposal significantly undervalues Orient-Express and its future prospects. Like that of many other hospitality companies and luxury sector participants, we believe the current price of Orient-Express shares reflects the market’s short-term outlook and not the long-term value of its assets. We strongly believe your proposal is significantly below the value of Orient-Express. In addition, the market value of our unique properties is underscored by the prices per key, paid in some recent sales of iconic assets. Now would be a highly disadvantageous time to sell the company. Accordingly, our board has unanimously determined that it is not in the best interests of Orient-Express and its shareholders to pursue your proposal,” Lovejoy wrote in his letter dated November 8, to Krishna Kumar.

“OEH is right in its assertion that IHCL is buying at the trough of the down cycle. Valuations, including those of IHCL itself, are depressed at this point of time, and this is the reason IHCL wants to move in now. But with a weak balance sheet and a net loss of Rs 6.36 crore for the quarter ended September 31, the company’s balance sheet is not in a position to support much incremental debt,” said a leading investment banker who has worked with the Tatas. “The return ratios for IHCL are already depressed with the conversion of warrants into shares by the Tatas. Further equity dilution will only aggravate this trend,” said a leading hotel sector analyst at a domestic brokerage.

Interestingly, IHCL had planned to install Paul H White the ex-CEO of OEH as the de facto CEO to run OEH in place of Philip Mengel interim CEO of OEH. But late last week OEH replaced Mengel with John M Scott III as its new president and CEO and a director on its board. The 47-year old Scott, most recently served as president and CEO of Rosewood Hotels & Resorts, where he oversaw a portfolio of 17 ultra-luxury hotels located in seven countries with combined revenues of more than $500 million. During his time at Rosewood, John was responsible for doubling the number of hotels under management, significantly increasing Ebitda and securing an active development pipeline of new hotel projects. With experience in strategy, operations, finance, and brand building, Scott has been charged by the OEH board with driving growth and delivering on the potential of Orient-Express’ portfolio.

IHCL and Charme II had agreed to set aside a certain portion of equity of OEH to Paul White and his key team members as sweat equity and enter into employment agreements with them on the successful completion of the bid. Also Hotel Advisors founded by White would be entitled to fees under a consultancy agreement if the transaction proposed by the SPV were consummated. White has also been appointed as one of the four directors of the Bermuda based company that has bid to take over OEH. Charme II would nominate one director while IHCL nominate the remaining two directors on the Bermuda based firm’s board.

“The SPV has been incorporated in Bermuda so as to make it easier to merge OEH post acquisition into the SPV,” a Tata Sons official told FC.

Interestingly, if the bid is not successful, the Tatas are solely responsible to pay all expenses incurred by the SPV which has bid to acquire OEH.

“With the appointment of a world-class CEO, whom the board is confident will drive superior long-term value, we believe Orient-Express has a bright future as an independent company serving the interests of shareholders as well as guests,” Lovejoy said last week, in a statement. Prior to joining Rosewood, Scott served for seven years as managing director of acquisitions and asset management at Maritz, Wolff & Co’s private equity real estate investment group.

If IHCL wishes to up its bid, then it may have to revisit its funding plan, as it will already be taking on $700 million in incremental debt through its Hong Kong subsidiary Piem International and its British Virgin Island subsidiary Samsara Properties. Also, the tripartite shareholders agreement entered into between Tatas and Montezemolo & Partners on behalf of Charme II Fund requires all parties to be consulted and accord their approval to any revision in the offer price.

The Tatas have, however, retained the option to induct other non IHCL-controlled Tata entities to make additional financing commitments beyond what has initially been proposed by IHCL. Additionally, the Tatas have also retained the option to fund part or full amount of Charme II fund’s commitment at the sole option of the Tata group.

“We will have to see how we manage the acquisition cost and deleverage the balance sheet by fusing the two companies together as we had previously envisaged this deal to have a 50:50 debt to equity funding mix. Also, a hostile deal is not possible since an OEH subsidiary holds the Class B shares of the company that would give the board the right to veto any hostile takeover attempt,” the IHCL official quoted earlier told FC.

Deutsche Bank Securities and Goldman, Sachs & Co are acting as financial advisors to OEH.


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