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It is not always that a rights offer of a company comes packed with a potential takeover angle. EIH, which has Reliance Industries and ITC as shareholders at little less than the 15 per cent holding each, is making a 5:11 rights offer at Rs 66 per share to raise Rs 1,179 crore. Both the potential bidders will get to retain their current stakes in EIH only if they subscribe to the rights offers. Any portion of the offer made to the public that remains unsubscribed may be picked up by promoters, increasing their holding in the company.
Retail shareholders who do not subscribe to the offer may suffer substantial equity dilution. With the stock close to its 52 week low and a revival likely in the hotels business over the medium term, the timing of the offer appears reasonable. As for valuations, the offer price, at a discount to the current market price of Rs 77, values the company at about 24 times its likely FY12 per share earnings, at a premium to Hotel Leela (15 times) and Indian Hotels (23 times). Manageable debt on books, improving outlook for the hotel industry (especially in Mumbai where it has a strong presence) and the heightened interest in EIH, however, justify the premium to some extent.
Offer proceeds
Of the offer proceeds, EIH plans to use Rs 900 crore to retire debt; Rs 100 crore towards setting up a flight kitchen facility at the Indira Gandhi International Airport in New Delhi and the balance towards issue-related and general corporate expenses. The company had an outstanding debt of about Rs 1,810 crore, as of September 2010 . With interest rates likely to harden further, EIH's plan to prepay debt promises to significantly bring down its interest burden; debt: equity ratio is expected to come down from 1.15 levels now to 0.27. The impact on earnings, however, would not be commensurate as the offer will also cause a 45 per cent expansion in the company's equity base.
Tug of war
But what really makes the offer attractive is the prospect of an open offer or a price war between Reliance Industries and ITC, if either or both their shareholdings cross the 15 per cent mark. Note that Reliance Industries currently holds about 14.8 per cent in EIH, while ITC's shareholding is at 14.98 per cent. While ITC has long maintained that its interest in EIH is only strategic , it would be interesting to see if it participates in the offer. It would have to shell out about Rs 177 crore just to retain its shareholding.
What's also interesting is that while ITC has accumulated EIH shares over a period of a few years, RIL is a new entrant. It bought 14.2 per cent stake from EIH promoters at about Rs 182 apiece. Interestingly, the Oberoi family, which holds 32.31 per cent stake, has said that it would be subscribing to the rights shares that other shareholders relinquish. Subscribing to the rights, therefore, would let the retail shareholders make most of the possible upside in case of any open offer(s). The business environment is beginning to look up for the hospitality sector now. After the terrorist attack on its Mumbai property in 2008 and the subsequent recessionary trends, EIH has witnessed a growth in occupancies and room rents across its properties. The offer closes on March 15.
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