Is Tata ready for a second rebuff from Orient Express?

Indications are that Ratan Tata may not be able to fire that big-bang parting shot with acquisition of Orient Express, the Bermuda-headquartered group that owns and operates luxury hotels, trains, cruises and restaurants worldwide.

According to a report in Bloomberg, traders are betting that the board of the luxury chain will turn down the offer from Indian Hotels Company (IHCL) that owns the Taj Hotels brand in India.

IHCL has offered $12.43 for Class A share each, which according to the report is “the highest takeover premium in the hotel industry”.

Class A shares are those with voting rights.

[caption id=“attachment_507560” align=“alignleft” width=“380”]  Investors have been critical of Orient Express’s earlier refusal to rope in a partner, even as a crippling economic slowdown dented its fortunes.[/caption]

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The offer had pushed Orient Express shares up 41 percent only to decline later to below the offer price. The stock has stayed at that level ever since.

This is an indication that the stock market is not expecting the deal to go through.

Investors have been critical of Orient Express’s earlier refusal to rope in a partner, even as a crippling economic slowdown dented its fortunes.

In 2007, the company had rejected a Tata offer of $60 a share. Shares of Orient Express were trading around $57 when Tata picked up a stake in it.

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Later the company had also spurned a $2.55 billion offer from Dubai Holding Commercial Operations Group LLC.

Orient Express has an organisational structure which helps it reject any offer that is unsolicited.

How far can IHCL stretch the offer?

IHCL Vice-Chairman R K Krishna Kumar has expressed his desire to sweeten the deal, if required.

To what extent, is the billion dollar question.

The Orient Express management wouldn’t “blink their eyes” at an offer less than $15 a share, and the value of the company’s assets may justify bids as high as $20 a share, says Bloomberg report quoting Albert Saporta, managing director at Geneva and Tel-Aviv- based Alternative Investment Management & Research SA.

Will IHCL be able to pull the deal off at this level?

One has to remember that its balance sheet already highly leveraged. Its total debt was Rs 3,248 crore in FY12. This is almost five times the gross profit, according to data from Bloomberg.

If Indian Hotels raises the offer price, its shareholders are unlikely to be enthused. They are already unhappy about the erosion in the value of the company’s investment in Orient Express.