Reliance Industries Ltd (RIL) announced on Monday that it has acquired a 14.12% stake in EIH Ltd, through its wholly owned subsidiary Reliance Industries Investment and Holding Pvt. Ltd, from Oberoi Hotels Pvt. Ltd and certain other promoters of EIH. The deal is valued at Rs1,021 crore, valuing the hotel company at Rs7,230.87 crore.
With the acquisition valuing each EIH share at Rs184, substantially higher than its closing price of Rs135.20 on Friday, it’s no wonder that the scrip rose 11.5% on Monday in an otherwise tepid market. With the stock closing at around Rs150, it’s still some way off the price at which the deal has been done.
The Reliance management has said that it will support the EIH management. But if the deal is purely for investment, the question is: why should the Reliance group pay a premium for a company without getting control? It’s not as if the business is greatly undervalued—in a research note after EIH’s rather disappointing June quarter results, analysts from Edelweiss Securities Ltd maintained their target price of Rs120 a share.
This is not the first time that the EIH management has tried to find a white knight. With ITC holding 14.98% in the company and breathing down its neck, one can’t blame the EIH management. Earlier, it had tried to bring in Analjit Singh, but that deal fell through, reportedly on differences in valuation. This time, there was an additional reason for worry—when the new takeover code comes into effect, the threshold for an open offer would rise to 25%, and ITC could have taken the opportunity to increase its stake.
The EIH stock will now be in play on hopes that ITC will rise to the occasion and make an open offer. But with the kind of deep pockets that Reliance has, that is unlikely. Another trigger would be a possible increase in stake by the Reliance group. But even if we were to take the Reliance statement of the deal being merely for investment purposes at face value, the fact of the matter is that EIH’s promoters now have the cash to expand the business. After this deal, the EIH promoters’ stake will drop to 32.3%. But, if the EIH management acquires another 5%, as it can do through the creeping acquisition route, then collectively Reliance and EIH would own over 50%, a decisive majority. RIL’s acquisition of a stake in EIH at a substantial premium is a vote of confidence in the company and will impact the stock accordingly.
What about ITC’s shareholders? If ITC keeps its stake in the company, its shareholders will benefit from the fact that the stake is worth much more now and ITC could sell it at a later date. So, while ITC may have lost an opportunity to make a significant acquisition, it may on the whole be marginally positive.
The big question, though, is what it means to the Reliance group.
RIL’s entry into the hotel business is a completely unrelated diversification, although Rs1,021 crore is loose change for the company. It’s getting into telecom and has made known its intentions to get into power. But while the power business may not be difficult, given RIL’s project management skills, the hotels business is completely different. It would be a good thing, therefore, for RIL to allow the Oberois to manage the business, rather than take it over.
Clearly, RIL has an enviable problem of not knowing what to do with its excess cash. Handing it over to its shareholders may be a good idea, but it’s unlikely to happen.
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