Checkmate at The Oberoi

The mighty Mukesh Ambani steps in to confront ITC’s Yogesh Deveshwar at East India Hotels. Few corporate battles can get bigger than this.

This promises to be the mother of all corporate potboilers. One of India’s iconic hotel companies as the battleground, and two of the country’s top companies ranged against each other for a share of the pie. When it was announced that Mukesh Ambani’s Reliance Industries had taken a 14.12 per cent stake in East India Hotels (EIH), the company which runs the Oberoi and Trident chain of hotels, it became clear that this would be one long and interesting story surrounding a company which has been at the forefront of India’s hospitality industry.

Two aspects of RIL’s EIH share purchase—of a hefty Rs 1,021 crore—are of particular relevance. First, the deal was struck with the promoters of EIH, the Oberois, at 22 per cent above the previous day’s closing price. Second, and equally important, rival  hotels major ITC is already sitting with a strategically crucial stake in EIH, of 14.98 per cent just a shade under the regulatory trigger point of 15 per cent beyond which it would have had to make an open offer under extant takeover regulations. Clearly, Mukesh Ambani has come in as a white knight for the Oberois, who have been living under the shadow of an open offer threat from rival ITC. Having assiduously built up the company into a major player in the luxury hotels space, it was always unlikely that the Oberois would give up control of the company in a hurry. A counter-strategy to ITC was always in the offing. What has surprised most in corporate circles is the identity of the white knight.

Several analysts are confounded about why Ambani decided to enter the hospitality sector. There are also some theories doing the rounds of a possible deal with ITC. To be sure, RIL has been aggressively entering new areas of late—whether in aviation, telecommunications or even setting up a fund of its own. Viewed against that diversification strategy, the EIH share deal does not look that out of sync. Here is an iconic hotels company, present in both the luxury and five-star categories, with extremely well-known brands and properties with a major global footprint. For decades, Oberoi has been synonymous with hospitality in India, and RIL could hardly have chosen a better brand to associate itself  with. 

What gives this an interesting twist is the presence of ITC. Even more so, given the fact that ITC is today a very different company from what it was in the mid-90s. Having consciously worked to de-risk its tobacco portfolio and convert itself into a fast-moving consumer goods major, ITC’s gameplan on EIH has been one of waiting and watching for the right opportunity. Hotels has become a huge business for the Kolkata-headquartered company and its stake in EIH was always strategically significant. The important thing is, ITC Chairman Yogesh ‘Yogi’ Deveshwar has always been known to be combative about his ambitions for the company he runs. Whether it is keeping the mighty British American Tobacco (Bat) out of the company’s management control or pursuing aggressive expansions of his flagship brand Wills into new sectors like lifestyle, Deveshwar has been creating the new ITC brick by brick. The Mukesh Ambani stake in EIH threatens to scupper one major element of his plan.

For the Oberois, this is a dream situation. If Deveshwar has to be kept at bay, you could hardly get a better entity on your side than the country’s most powerful private sector company. The deal also gets the Oberois a substantial amount in funding, with speculation rife that there could be a share issue at a future date, with the Oberois and Ambani ending up with equal stakes. All of which means Deveshwar will have to revisit his strategy on EIH. He will either have to be content with the existing stakeholding or confront the Oberoi-Ambani combine. 

The shareholders of all three companies will be keenly watching this unfolding story. This is one drama which has only just begun.

These are the author’s personal views. He  can be reached at majumdar.sourav@gmail.com

East India HotelsITCMukesh Ambani