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News Analysis: Why a hostile bid for Orient-Express isn't possible

Many shareholders have in the past unsuccessfully contested a 'poison-pill clause' that prevents any internal shareholder from buying more than 15% stake in the hotel chain without an agreement with the board

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If the Tatas could, they would have loved to change the surname of Jesse Robert Lovejoy to 'Killjoy’. The eminent lawyer, who happens to be the chairman of Orient-Express, has dashed the hopes of Tata-owned to be in the driver’s seat of the Bermuda-based firm that owns 45 hotels, cruise and luxury rail businesses in 22 countries, including ‘21’ Club – one of New York’s most iconic restaurants and watering holes.

It’s a foregone conclusion that the group has to increase the offer price much beyond the $12.63 a share, which was a 40 per cent premium to the company’s stock price at that time. Post the Tata offer, the stock has zoomed 30 per cent already. In any case, the board had in 2007 rejected a $42-a share offer by the Tatas (the matter in fact ended in a high-profile skirmish). In fact, the Orient board had even rebuffed the Dubai-based which had in the same year offered a price that is close to the Orient-Express stock’s peak level of $60 a share.

The price has come down significantly since then, courtesy the slowdown in Europe where most of the company’s properties are located. And that’s precisely what the Orient-Express management has cited while rejecting the latest Tata offer. Several analysts have also said Orient-Express should generate a value of nearly $18 per share based on an estimated value per key for each of the company’s assets and everyone seems to agree that Indian Hotels tried to acquire Orient-Express at prices that are at the bottom of the company’s valuation cycle.

But all this is irrelevant as Orient-Express has not even responded to the Tata suggestion of a meeting to figure out the “value drivers” even though many shareholders are frustrated with the board which has repeatedly rejected offers for the company. Some of them had even unsuccessfully sued the board, arguing that it has breached its fiduciary duty.

But shareholders are powerless due to the unusual dual-class share structure of Orient-Express, which gives absolute power to the board of directors. That’s because of a “poison-pill clause” that prevents any of its internal shareholders from acquiring more than 15 per cent of the company without an agreement by both parties.

The company’s share structure complicates the matter. The share structure is dual class, consisting of Class A and B shares. Indian Hotels’ bid is for 93 per cent of the Class A shares, which trade publicly on the New York Stock Exchange and represent 85 per cent of total shares outstanding. These shares hold approximately 36 per cent of the voting rights. A wholly owned subsidiary of Orient-Express, called Orient-Express Holdings owns all 18 million outstanding common shares, which represents about 15 per cent of outstanding shares and 64 per cent of the combined voting power of the two classes for most shareholder vote matters.

Barclays says the share structure has historically been concerning for investors, given the limited voting power of the publicly held Class A shares and the majority control of the company by the board and management through the Class B shares. “We believe this dual class share structure could once again become an overhang on the shares if this deal is rejected,” Barclays had said last week.

It’s also significant that Orient-Express has made several issues of new equity, diluting existing shareholders by nearly 20 per cent – a reason why Indian Hotels’ original shareholding of 11.85 per cent has come down to 7 per cent.

The Tatas obviously understand why it’s important to get on the right side of at least some members of the Orient-Express board. That perhaps explains why the letter sent by Indian Hotels to the Orient-Express board said it "has always endeavoured to pursue friendly transactions with counterparties."

That friendly tone and willingness to open the purse strings wider may be the only options left for the Tatas.

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