Mukesh checks into EIH with a 14.2% stake

In a surprise move in the ongoing battle for control of East India Hotels (EIH) and its flagship Oberoi properties, Reliance Industries Ltd (RIL) on Monday picked up 14.2 per cent stake in the hotels major.

RIL paid Rs 1,021 crore, which is a 22 per cent premium on the company’s current market price of Rs 151 a share, valuing EIH at Rs 7,200 crore — just Rs 300 crore less than the Indian Hotels (owner of the Taj chain) market cap of Rs 7,500 crore.

RIL bought the stake from EIH promoter P R S Oberoi and two other promoter entities, Oberoi Hotels Pvt Ltd and Aravali Polymers LLP. Following this transaction, the promoter stake in EIH will come down to 32.41 per cent.

RIL's investment was made via wholly-owned subsidiary Reliance Investments & Holding Pvt Ltd. RIL maintained that this is purely a financial investment, and would not impact the day-to-day running of the hotels. “EIH has excellent future prospects,” RIL said in a statement. Expressing full faith in the EIH management, RIL said it would lend its full support and that there would be no change of management, operation or control.

But analysts and sector watchers see RIL’s role as that of a white knight for the Oberois, considering that the tobacco-to-hotels major ITC also holds a strategic 14.9 per cent stake in EIH. ITC’s presence — always a cause for discomfort — has long been perceived as hostile by the EIH management. ITC, too, had made it clear that given a chance, it would like to hike its stake, but would not unleash a hostile bid.

Just a week ago, P R S Oberoi and EIH deputy chairman S S Mukherjee made it clear to the media that they would like to ring-fence the promoters' holding in the company by gradually increasing their stake to an eventual 51 per cent.

But analysts said capital proved an issue.

EIH had earlier considered the idea of a rights issue, but it never took off. “Now, with over Rs 1,000 crore in hand, we will have capital to fund both the ambitious expansion plans and counter any big investor,” said an Oberoi official. “Compared to many of our latecoming peers, in terms of adding total number of keys, we have been slow,” he adds.

"This transaction is done by the promoters of EIH only as an attempt to ward off any hostile bids by rivals ITC. RIL is a stronger player and ITC knows this,” admits Himani Singh, hotel analyst, Elara Capital.

ITC declined to comment on the issue, but company officials said their investments had given them a Rs 500-crore profit in 10 years and the company would like to stay invested.

For the last one-and-a-half years, the Oberoi management has been scouting for a white knight to counter the ITC threat. Talks with Analjit Singh of  Max progressed to an advanced stage, though sources said Bharti's Sunil Mittal and DLF had also made similar overtures. Under the plan, Analjit would have acquired 26 per cent from the promoters and then opted for an open offer, following which Analjit and the Oberois were to together hold 52 per cent in EIH. Analjit was supposed to be the single-largest shareholder. But the talks fell through at the very end.

Analjit currently holds a little less than 4 per cent in EIH. Sources close to him said he has been looking at gradually bringing down his investment and has been in touch with the Oberoi management seeking an exit route. “I wish Mr P R S Oberoi all the very best,” Singh said, after the RIL acquisition news was announced.

RIL watchers said this was yet another attempt by Mukesh Ambani  to consolidate the group's play in the India consumption story. RIL earlier bought a strategic stake in Captain Gopinath's Deccan 360 cargo venture and then hit the headlines in June by reentering telecom after buying out Infotel Broadband for $1.2 billion.

But RIL sources said RIL's association with EIH goes back many years. Mukesh Ambani’s father, Dhirubhai, considered The Oberoi in Mumbai one of his favourite hotels. Located just one block away from his headquarters, Dhirubhai was a frequent visitor to the Oberoi health club. Mukesh Ambani and P R S Oberoi’s relationship is that of family friends.

In fact, RIL sources said both Mukesh Ambani and trusted lieutenant Anand Jain had always been willing to provide support to PRS Oberoi, and if the situation warrants, they would step in and prevent any hostile attempts to take over the premier hospitality chain. That promise finally bore fruit. “Ever since the Analjit deal didn’t go through, talks with RIL intensified,” said an official involved in the talks, who did not wished to be identified.

But is this a foot in the door of EIH for RIL? Sources said such a possibility cannot be ruled out. Even though RIL maintains it is only a financial investor, people in the know said this move is bound to impact succession planning at EIH. Following the new takeover code regime, analysts said they expect RIL not only to hike its stake, but also taking board positions.