Advantage new owner in Taj Mansingh auction

18-month revenue share breather if non-Tata entity wins bid

Around 40 years after the Taj Mahal Hotel, also known as Taj Mansingh, started out in the Capital, rules of auctioning the property are getting the final touches. The e-auction is likely to begin sometime in October-November, and the process would take close to 45 days to conclude, according to sources. Apart from the Tata group, which owns the Taj Mansingh, several other businesses are preparing to bid for the 294-room property in Lutyens’ Delhi. 

If a non-Tata entity wins the bid, the Tata group would get six months to operate the hotel before vacating the premises, the terms of the auction would state. Also, in such a scenario, the non-Tata company would be given 18 months to refurbish and renovate the hotel before revenue-sharing kicks off with the New Delhi Municipal Council (NDMC), which owns the 3.78 acres over which the Taj Mahal Hotel is located at 1 Mansingh Road. In that duration of one-and-a-half years, the successful bidder would need to make a down payment, equal to an average of the revenue-share amount paid to the NDMC in the last three years by the Tatas for this hotel.

The fact that revenue-share would kick in after 18 months of the auction if Tatas lose the Taj Mansingh is seen as an advantage for the non-Tata entities, as they would need to begin from scratch. While for the Tata group, the Taj Mansingh is among its prized assets and it’s likely to try and keep the brand, it may not overbid for the hotel, sources indicated. Tatas would have no first right of refusal in the auction process, to be conducted by SBI Caps. 

The amount of annual revenue-share that the successful bidder would have to pay the NDMC would be determined at the auction, another source pointed out. “That’s a parameter at the auction,” he said. The bidders would have to mention the percentage of revenue that they would want to share with the NDMC, and the entity quoting the highest revenue-share would emerge a winner. Although there’s no official figure available on this, sources said that at present Indian Hotels Company (IHCL) shares close to 20 per cent of the annual revenues coming from the Taj Mansingh with the NDMC. 

It is learnt that a floor price, at an average of preceding three years’ top line share that the NDMC got from IHCL, would be set for the auction of the Taj Mansingh, a key asset of the chain. The previous year’s annual revenue of Taj Mansingh, which is a part of the Tata group’s IHCL, was estimated to be over Rs 150 crore. IHCL’s revenue from operations was Rs 2,391 crore in the financial year 2016-17. 

However, a leading consultant in the hospitality sector pointed out that the floor price was not for the value of the Taj Mansingh. “Rather, the floor price is meant to create a yardstick for what new lessee will owe the NDMC (lessor). That’s not the value of the hotel, but just the value of the revenue-share owed at the very minimum.” 

As for value of the hotel, bankers and consultants had recently told Business Standard that it could be auctioned at Rs 3 crore to Rs 4 crore a room. So the 294-room property could go to IHCL of the Tatas, the current owners of the Taj Mansingh, or any other business group for an estimated Rs 1,000 crore. Then there are others suggesting that the hotel could even fetch a price as high as Rs 2,500 crore to Rs 3,000 crore because of the location and the brand value. It’s interesting past, from the time J E D Fonseca was running a 23-room hotel under the name Fonseca Pvt Ltd to the critical role of Ajit Kerkar, then chief of Tatas’ hospitality business, in getting to build a Taj property in Lutyens’ Delhi with Sanjay Gandhi’s help, also adds to its value, sources in the hospitality industry said. 

In 1976, IHCL had signed a lease agreement with the NDMC for the Taj Mansingh, and two years later the hotel was inaugurated. In 2011, however, the 33-year-old lease ended and a court battle started off. Four years ago, the NDMC decided to auction the property, while IHCL challenged the decision in the Delhi High Court. After much back and forth and several lease extensions, the Supreme Court in April gave a go-ahead for auctioning the Taj Mansingh.

THE STORY SO FAR

• 1976: The Indian Hotels Company, owners of Taj group of hotels, and NDMC sign a lease agreement for Taj Mahal Hotel in New Delhi
• 1978: Taj Mahal (or Taj Mansingh) inaugurated
• 2011: The 33-year lease pact between IHC and NDMC ends
• 2012-13: NDMC decides to auction Taj Mansingh Hotel, Indian Hotels challenges the decision in Delhi High Court
• Sep 2016: HC allows NDMC to go ahead with auction
• Nov 2016: Indian Hotel moves Supreme Court
• Apr 2017: Supreme Court allows auction