Tata's Indian Hotels teams up with Italian fund for Orient-Express

After being rebuffed five years ago, the Tata Group Indian Hotels Company has once againplaced an acquisition bid for international luxury hotel chain Orient-Express Hotel.

The Indian hotel chain has team up with Charme II Fund, an Italian fund managed by Montezemolo and Partners SpA, and on Thursday sent a letter to Orient-Express Hotels proposing to purchase all outstanding shares of Orient-Express’s Class A common stock for $12.63 per share in cash, valuing the deal at around $1.86 billion, including Orient-Express’s net debt.

Indian Hotels was earlier rebuffed by Orient-Express in a recent approach to take a “significant” stake in the company. Orient-Express in 2007 turned down an offer from Indian Hotels to form a strategic alliance. That year, Indian Hotels acquired a 10 percent stake in Orient-Express for about $211.3 million. It now owns about 7 percent.

For several years Indian Hotels has been trying to raise its stake in Orient-Express but has been stalled by its management. In 2008 Paul White, then Orient-Express’s chief executive, said the combination wasn’t a “strategic fit” and wasn’t in the best interest of Orient-Express’s shareholders. It had also said that any association of its luxury brands with the Taj’s brand and properties would result in a reduction in value of its brands and businesses. However, after roping in Charm II fund, which was established by the Montezemolo family, the Tata Group has assured Orient Express that its identity of a luxury hotel chain will be maintained.

The all-cash deal is a 40 percent premium to the stock’s closing price on Wednesday.

Under the proposed deal, Indian Hotels would contribute $650 million (around Rs 3,500 cr) in cash while the rest would be funded by other Tata group entities and debt from Bank of America, ICICI Bank and Standard Chartered Bank. Italian group Charme II Fund would invest $100 million for a minority stake in the newly combined group. Indian Hotels would also assume Orient-Express debt, which stood at $529.5 million at June 30.

The Italian connect is an interesting angle. According to a report in Mint , “Montezemolo and Partners is the family investment vehicle of Luca di Montezemolo, chairman of Ferrari and a close personal friend of Ratan Tata, the chairman of Tata Sons. Tata and di Montezemolo are also directors on the board of Fiat SpA, which owns Ferrari and used to have a tie-up with Tata Motors.” Their close friendship also resulted in Fiat and Tata Motors coming together for industrial corporation in India.

[caption id=“attachment_495769” align=“alignleft” width=“380”] Reuters[/caption]

“Indian Hotels is seeking friendly transaction negotiations and is prepared to devote all necessary resources to mutually beneficial agreement,” Indian Hotels said in a statement.

If it succeeds, the deal would be among the largest overseas deals from an Indian company. It is a rare example of a hostile bid by an Indian firm.

Orient-Express stock closed 22.5 percent higher at $11.05 on the New York Stock Exchange.

A spokeswoman for Orient-Express could not immediately be reached for comment.

The steel-to-software Tata conglomerate is India’s biggest business house and has been acquisitive in recent years. Its Tata Motors made one of India’s signature overseas deals when it paid $2.3 billion in 2008 for British luxury car maker Jaguar Land Rover.

Indian Hotels met with executives of Orient-Express in August to discuss “a closer alliance” between the two companies, according to a letter from Indian Hotels Vice Chairman R.K. Krishna Kumar that was included in a company filing with the U.S. Securities and Exchange Commission on October 18.

Orient-Express directors turned down the offer for a significant equity investment, according to the letter.

“We believe this offer is in the best interests of Orient-Express Hotels and its shareholders, and deserves careful consideration by your Board of Directors,” the letter said.

“We believe this premium cash offer represents a compelling value proposition for the Company shareholders, especially in light of the current fragile state of the global economy and the lack of clarity about the prospects for recovery,” it said.

The eurozone economic crisis has squeezed demand for luxury travel, and the weakening of the euro and other currencies against the dollar has crimped revenue at Orient-Express, which has been divesting non-core assets to help reduce debt, increase liquidity and invest in core assets.

Under the proposed transaction, Orient-Express would remain an independent company with an independent management team.

Christopher Agnew, an analyst with MKM Partners, said Orient-Express has a dual-class share structure that he thinks would prevent Indian Hotels from making a hostile takeover. He said there could be a back-and-forth between buyer and seller, with the seller looking to get a higher price.

“This company does have a stake already, so it has shown interest before,” Agnew said. “Orient-Express has high quality assets around the world which arguably are trading below their intrinsic value. So from that perspective, is it that surprising that someone wants to look at the business?”

Indian Hotels has 99 hotels in 56 locations across India and 16 international hotels including the Pierre Hotel in New York.

Orient-Express owns or part-owns and manages 46 luxury hotels, restaurants, tourist trains and river cruise properties in 23 countries.

Bank of America Merrill Lynch is advising Indian Hotels.

With inputs from Reuters