Tata Group hospitality firm Indian Hotels has marginally hiked stake in luxury hospitality chain Orient Express from 9.57% to 9.7%, by participating in a fresh issue of shares. In the process it has also brought down its average cost of acquisition of the shares first made between September-December 2007 by 28% to $36.4/share as against the average cost of buying them earlier at around $50.7/share.
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But despite this, it is sitting on value erosion of 82% as the NYSE listed firm is trading at $7.97 after recovering from $3 levels two months ago. Infact, Tatas had picked stake at a price which was close to its all time high. Tatas had originally picked 10% in the firm in September 2007 and hiked it to 11.5% later that year with a total investment of around $247 million.
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Tatas and Dubai's Jumeirah Assets (another large shareholder) had made separate offers to buy the firm out at approximately $60/share. Jumeirah held 7.6% of the firm before the issue which was not accepted by the Orient Express management. It is not clear if Jumeirah participated in the new share issue.
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In the meantime, if the underwriters(Deutsche Bank Securities and Barclays Capital) decide to exercise their over allotment option for the issue then Tatas stake will fall marginally to 9.28% from 9.57% before the issue.
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Tatas have acquired another 2.25 million shares in Orient-Express to add to its original 4.88 million shares bought in 2007.These shares were part of the 22.5 million fresh shares on issue at a price of $5.75/share. The Tata group has reportedly tapped a $51-million loan from ICICI Bank UK to part finance the share purchase which would have cost $12.94 million. The loan has been taken by a group subsidiary called Samsara Properties which is based in the British Virgin Islands. Interest on the loan will accrue on a daily basis at a rate of Libor plus 4 per cent.
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The new investment by Tatas is seen as an averaging out strategy as well as a wait and watch plan to see through an eventual takeover. Tatas had been earlier rebuffed by the management of the Bermuda based firm who lord over the firm through a dual class ownership system. Under this system the management owning B class shares have much more voting power compared to ordinary class A shares holders like Tatas(Indian Hotels).
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This ownership structure had been challenged by various institutional investors including hedge fund giant DE Shaw which owned 6% in Orient Express prior to the new share issue. They had argued that such a share ownership system allows the board members (holding Class B shares) to block any takeover attempt.
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Also see our earlier report
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WHAT NEXT?
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But why did Tatas borrow four times what they required for the transaction from ICICI Bank UK? This seems to suggest that they are looking to buy out some other shareholders of the firm. But what purpose it would serve in gaining control of Orient Express is unclear as the dual ownership structure virtually kills any hostile takeover attempt.
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What could work in Tatas favour is the financial troubles at the firm. In its prospectus to the issue, Orient-Express said its net loss for the first quarter ended March 2009 was expected to be $14.6 million compared with a net loss of $4.3 million in the same period of 2008. The hospitality firm was looking to raise $123 million(or upto $141 million if underwriters exercise their option) to pay off debt and use for working capital requirements.
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CAN TATAS REALLY TAKE OVER ORIENT EXPRESS?
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Given the current structure no. This is because the class A shares(which Tatas and other shareholders own) carry just one tenth voting power of class B shares. As a result the voting power of management stands at 78.3%(pre issue) despite owning just 18 million shares as the 50.05 million class A shares is worth just 5 odd million in terms of voting rights of total shares.
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Even if Tatas end up buying out all other class A shareholders it would garner 73.46 million shares which would be worth 7.34 million out of the total shares at vote at 25.3 million representing voting rights of just around 29% as against its actual voting right which stood at 2.1% before the issue.