ITC & EIH to combine hotel biz, become largest hospitality chain

Source: Financial Express, Sept 29, 2010

New Delhi: Diversified conglomerate ITC Group and hospitality major EIH have drawn up a blueprint to combine and emerge as the country’s largest hotel chain by revenues. Once the plan fructifies, it would see a three-way venture between the two groups and Reliance Industries (RIL) which recently picked up 14.8% stake in EIH. Currently, the Oberois hold 32% stake in EIH, while ITC holds 14.98%.

According to the plan being worked out, ITC Group would demerge its hotel business, which would then form a partnership with the EIH group. The combined entity would have a much larger revenue base of Rs 1,948 crore, which can then be leveraged for further expansion both domestically as well as overseas. The coming-together of the two hotel chains would make this the country’s largest hotel conglomerate in terms of revenues, outstripping the Tata group’s hospitality company Indian Hotels.

Indian Hotels is currently the largest hotel chain in the country in terms of revenues, clocking Rs 1,566 crore in the fiscal 2009-10.

Once the merger between the ITC hotel division and EIH is complete, the running of the hotel business and the day-to-day management would be in their hands and RIL would not interfere in this aspect.

Sources said talks between the parties are at a preliminary stage, but would gather steam shortly. Analysts said that it makes sense for ITC to demerge its hotel business and unlock some value from it. The bulk of ITC’s gross revenue comes from the tobacco business. In 2009-10, cigarette sales of ITC stood at Rs 17,283.03 crore, which is 66% of the company’s total revenue of Rs 26,259 crore. Revenues from the hotel division stood at Rs 910 crore.

When contacted, an Oberoi group spokesperson denied knowledge of any such plans. On its part, an ITC spokesperson did not respond to an emailed query till the time of going to the press.

In terms of hotel prop-erties, the combined en-tity would have around 128 hotels.

Currently, the ITC Group has over 100 hotels operated under four segments—Luxury Collection, Five Star Hospitality, Fortune Hotels and Welcome Heritage. The Oberoi group operates 28 hotels under the luxury ‘Oberoi’ and five-star ‘Trident’ brands. The group’s total revenues for the year 2009-10 was at Rs 1,038 crore.

Analysts tracking the sector observed that it made sense for ITC and EIH to come together. “The hotel sector is an asset-heavy business and needs capex to grow. However, the two would require to resolve the branding aspect,” an analyst tracking the sector told FE. In the past, ITC did not think of demerging the hotel business because the division needed capex to grow which would not have come on a standalone basis. However, cash flows in the business are fast-changing and with the two joining hands, they would strengthen further, analysts said.

Speculation over relations between the EIH group and ITC has been rife ever since RIL acquired a 14.12% stake in the company at the end of August and subsequently raised it to 14.8%. Since ITC also holds 14.9% stake in EIH, the move of the EIH promoter PRS Oberoi to rope in RIL as an investor was seen as a masterstroke to keep ITC in abeyance as far as raising its stake was concerned. It was held that since RIL has greater financial muscle, ITC would not risk getting into a takeover bid for EIH.

Currently, EIH is planning to raise up to Rs 1,300 crore through a rights issue.

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