Indian Hotels Company makes $1.86 bn offer to buy Orient-Express Hotels

Indian Hotels Company, the hospitality chain owned by the Tatas, along with an Italian fund has offered to buy Orient-Express HotelsLtd (OEHL), in an attempt to break a five-year impasse during which the Tata Group's efforts to increase its influence over the operator of luxury hotels, restaurants and tourist trains had always been firmly rebuffed.

In a statement issued on Thursday evening, IHC, which owns 6.9% of OEHL, said it had teamed up with Charme II Fund, an Italian Fund managed by Montezemolo and Partners SpA, to make an offer to purchase all the shares of NYSE-listed Orient-Express it does not own already.

IHC and its partner have offered to pay $12.63 per share, a 40% premium to OEHL's closing price on October 17, 2012, and a 45% premium to its 10-day moving average.

The announcement drove up the shares of the Bermuda-based company by 38%, the biggest gain since its shares started trading in 2000, according to Bloomberg News.

The total value of the transaction is $1.86 billion, including Orient-Express' net debt, the statement from IHC said. Indian Hotels would finance the deal through a combination of debt and equity, the statement added.

While Charme II Fund will invest $100 million for a minority stake in the combined company, the Tata Group has secured debt financing from Bank of America NA, ICICI BankBSE -0.86 % and Standard Chartered Bank.

Simultaneously, Indian Hotels has also entered into an agreement with James Sherwood, former chairman and founder of Orient-Express, whereby Sherwood has agreed to waive certain rights that would have been triggered in the event of an acquisition of Orient-Express by Indian Hotels. Bank of America Merrill Lynch is advising the Tata Group on the deal.

Charme II fund was founded by Luca Cordero di Montezemolo, one of Italy's most prominent businessmen who serves as chairman of Ferrari SpA as well as vice-chairman of UniCredit.

The New York Times quoted a letter from RK Krishna Kumar, vice-chairman of IHC, to Philip Mengal, CEO of Orient-Express, expressing "disappointment" that the latter's board was not willing to consider "a substantial equity investment by IHCL".

IHC currently holds over 71 lakh 'Class A' shares of Orient-Express aggregating to a 6.9% equity stake, acquired in stages during 2007 and 2009.

Earlier Attempts Rebuffed

The IHC board has given an 'inprinciple' approval to the management to make an offer to the Orient-Express board, seeking its consent for acquiring the outstanding 93.1% Class A common shares of the US hotel chain.

OEH has two categories of shares — Class A and Class B. Class A shares are traded on the NYSE while Class B shares, which have higher voting rights, are controlled by a Bermudabased subsidiary of OEHL, Orient-Express Holdings.

"Total funds required to consummate the transaction are in place. IHC also has an agreement with Montezemolo & Partners, an important Italian company directly owned by the Montezemolo family that is the manager of Charme II Fund, which will be a minority shareholder in the SPV set up for the transaction," the IHC note to BSE said.

"Indian Hotels has great respect for Orient-Express and its collection of unique luxury hotel properties around the world, and we are very excited at the prospect of bringing our two great companies and brands together," said Krishna Kumar. "We believe this premium all-cash offer represents a compelling and immediate value proposition for Orient-Express' shareholders and provides Orient-Express with access to the additional capital necessary to preserve its properties and heritage while potentially expanding its footprint."

"While we would have preferred to negotiate confidentially with Orient-Express, US securities laws required public disclosure of our proposal. However, we are prepared to devote all necessary resources to expeditiously complete due diligence. We look forward to Orient-Express' prompt reply and the opportunity to engage in further discussions that will result in a mutually beneficial transaction for both companies' shareholders and other constituencies," Krishna Kumar was quoted as saying.

In the past, Indian Hotels' efforts to increase its stake or seek control had been rejected by the company. The former CEO of Orient-Express, Paul White, had earlier written to Krishna Kumar saying he didn't believe "there is a strategic fit between your predominantly domestic Indian hotel chain and our global portfolio of luxury hotels".

The Orient-Express management had ring-fenced the company from any potential hostile attempt by including a "poison pill" clause. But by approaching the board directly and not the other shareholders, the Tatas may circumvent those roadblocks.

"By making it an Indo-Italian effort, they are trying to pacify the board and even the Orient-Express shareholders," said an investment banker following the development. The Tatas have also proposed to keep Orient-Express an independent company with an independent management team. Even as recent as August, the Tatas had said they had no immediate plan to take over Orient-Express.

"The Orient-Express is a good and strategic fit for us. However, nothing is on the table now for acquiring it. We may look at options later as it will be a longterm investment for us," Ratan Tata had told at the 111th annual general meeting of the company.

The bid comes just weeks after Indian Hotels posted a drastic drop in profit in the first quarter ended June to Rs 4.03 crore against Rs 21.31 crore in the yearago quarter and Rs 65.21 crore in the March quarter. Indian Hotels has been buffeted by the global economic downturn, which has affected occupancy rates in the US, and is saddled with consolidated debt of over Rs 3,500 crore.