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Earlier this month, when The Indian Hotels Company, majority owned by Tata Sons, said that it had called off its year-old $1.2-billion bid for Bermuda-based Orient-Express Hotels, investors let out a sigh of relief. The company's share price had dropped 5.4 per cent after the announcement last year in October. Investors were relieved because cash will be conserved. Financial discipline will return to the 112-year-old company at a time when its properties in the United States are showing distinct signs of a revival and competition in India is increasing by the day. The eagerness to acquire Orient-Express, which operates 44 luxury hotels across 22 countries along with cruises and luxury trains, had diluted its focus, investors and analysts say. For the quarter ended September 30, Indian Hotels had reported a loss of Rs 433.4 crore - its biggest-ever quarterly loss - after it wrote off Rs 370 crore for its 6.9 per cent stake in Orient-Express.
Shopping spree
Indian Hotels has, in the last eight years, picked up costly assets in key markets, especially in the United States. "Our strategy has been to try and increase our footprint in key source markets," Deepa Misra Harris, senior vice-president (sales and marketing), Indian Hotels, had recently told Business Standard. The logic is simple but elegant: as the bulk of travellers, business as well as leisure, come to India from the United States and Europe, the company can create a demand for its hotels by showcasing the brand in those markets. That's why Indian Hotels runs no fewer than 16 hotels in key overseas markets. "The reason for the US expansion is to create visibility for the brand in the source markets and to drive revenues from those markets," Harris had said. The company aims to generate 40 per cent of its revenue from outside in India in the days to come from about 30 per cent now.
What could help Indian Hotels achieve this target is that travel business in the United States is on the upswing. Occupancy at the Pierre in New York, Indian Hotels' flagship property in the United States, jumped to 77 per cent in the first half of 2013-14 (April to September) from 63 per cent in the corresponding six-month period of the previous year. This is the highest occupancy for the hotel since its reopening in August 2009 after the four-year renovation that cost Indian Hotels $100 million. (The renovation had raised the eyebrows of investors because it had overshot by almost twice the original budget of $35 million.) The company, best known for running the Taj brand of luxury hotels, had secured management rights for the landmark hotel in June 2005 for $5 million a year. Earlier, it had managed three-star hotels in Manhattan (the Lexington) and Chicago (the Executive Plaza) from 1981 to 1999. The Pierre deal gave a strong boost to its brand equity.
Occupancy at Indian Hotels' other two properties in the US, the Taj Boston and the Campton Place in San Francisco, also improved from 74 per cent to 80 per cent and from 79 per cent to 81 per cent, respectively, in the first half of this financial year. The company had bought the Ritz-Carlton in Boston in 2007 for $170 million from Millennium Partners and renamed it the Taj Boston in its effort to expand the brand in the US. After this, it had acquired the 110-room Campton Place in San Francisco for $58 million. It is not clear to what extent these properties have fed Indian Hotels' properties in the country. However, they have certainly created awareness for the brand in the United States.
Short on expectations
Orient-Express, however, did not meet the two criteria outlined by Harris for overseas acquisitions. "Currently, the recovery (in travel) is limited to the United States where Orient-Express has just a few properties," says Kaushik Vardharajan, managing director of hospitality-focused research firm HVS India. That is an important point. Orient-Express's distinctive properties include Hotel Cipriani in Venice, the Copacabana Palace in Rio de Janeiro and the 21 Club (restaurant) in New York. A majority of its properties are in Europe and South America where economic revival is still some distance away.
The decision to exit the Orient-Express deal brings the curtains down on a long story. India Hotels, through a wholly-owned subsidiary called Samsara Properties, had acquired a 10.01 per cent stake in Orient-Express for $211.28 million in September 2007. Following this, Indian Hotels made an attempt to pursue strategic discussion with Orient-Express which was rebuffed by the NYSE-listed company on the grounds that a tie-up with the Indian group would damage its brand equity. Orient-Express also expanded its equity capital that brought down Indian Hotels' stake to 6.9 per cent. Then, in 2012, Indian Hotels offered to buy the remaining 93.1 per cent stake in Orient-Express for an enterprise value of $1.86 billion that included debt on the books of the company. The $12.63-a-share offer made was at a 40 per cent premium to the previous-day closing price of the company on NYSE. It was considered one of the costliest bids made in the industry globally. Now, that costly chapter in Indian Hotels' history has been closed.
"The Orient-Express bid was not making sense for Indian Hotels' objective of reducing debt or bringing strategic value for its brand expansion," says Vardharajan. According to the offer made by Indian Hotels, it was not looking to rename or rebrand the Orient-Express properties after acquisition. Of course, the acquisition, if it had happened, would have given the company another luxury brand, after Taj, and would have had a rub-off effect on its entire portfolio. Apart from Taj, the company operates Vivanta by Taj, Gateway and Ginger hotels, each with its distinct positioning: Vivanta by Taj in the upper upscale segment, Gateway in upscale and Ginger in economy. Raymond Bickson, managing director of Indian Hotels, had in 2010, while talking to Business Standard, compared the company's brand portfolio to that of Tata Motors: The Nano at the entry level, and then the Indigo, Safari and Jaguar or Land Rover as one moves up on the value chain.
Cutting to the chase
Indian Hotels has dropped the costly bid at a time when the Indian market is getting more and more crowded. Most of the large hotel chains of the world - Starwood, InterContinental, Marriott International, Hyatt Hotel's Corporation and others - are looking to rapidly expand their footprint in the country. And business has been lacklustre, thanks to the economic slowdown. Tariffs, as a result, have fallen 10-12 per cent across categories (except budget hotels) in the last one year. This showed in Indian Hotels' last quarterly results: its domestic business grew a mere three per cent annually in the quarter ended September 30 to Rs 390 crore. According to HVS estimates, the supply of branded hotel rooms increased to about 96,000 in 2012-13 from 24,900 in 2000-01.
Indian Hotels has no option but to expand if it wants to hold on to its market share which has dropped from 25 per cent in the branded hotel space in 2000 to about 15 per cent now. The company, on its part, has increased the number of rooms to 12,000 from 6,500 in 2000. However, it needs cash to add more rooms. The cost of building a room for Taj is Rs 1-1.5 core, excluding the value of land, while that for Vivanta by Taj and Gateway is Rs 85 lakh-1 crore and Rs 40 lakh, respectively. This has obviously stretched the finances of the company - its standalone net debt increased to an all- ime high of Rs 2,832 crore at the end of September. On a consolidated basis, Indian Hotels reported net debt of Rs 3,607 crore in 2012-13 with debt-equity of 1.04. Besides, it reported zero return on capital for the second time in the last three years. The market capitalisation of the company has dropped to around Rs 4,000 crore now from Rs 10,000 crore at the end of 2005-06, the year it got the management rights for the Pierre. This is why dropping the bid for Orient-Express is good news for the shareholders of Indian Hotels. "Capital discipline surprised positively with chase of Orient-Express finally given up," wrote Saurabh Kumar, analyst at foreign brokerage JP Morgan, in a recent note.
