Mukesh eyes the EIH driver's seat

RIL & Oberois to have equal shares, post-rights.

Reliance Industries Ltd (RIL) and the Oberoi family will increase their shareholding in East India Hotels by buying the unsubscribed portion of a Rs 1,300-crore rights issue, which was cleared by the hotel major’s board today. EIH has decided to form a committee to decide on the rights issue price, ratio and other procedural formalities.

The Oberois hold 32 per cent — down from 46.43 per cent in August after RIL bought 14.8 per cent stake in EIH.

Sources familiar with the developments said RIL will make an open offer after the rights issue, as its stake will go beyond the 15 per cent threshold mandated by the market regulator. RIL and the Oberois will eventually have an equal stake in EIH.

ITC, which holds 14.8 per cent, may not be interested in raising its stake. Analjit Singh, who controls 4 per cent, will also prefer to exit EIH.

The sources said EIH is planning to float two new companies. One would operate the hotel chain and would be controlled by EIH, while the other would hold the hotel chain’s assets and be controlled by RIL, with Nita Ambani, wife of RIL chairman Mukesh Ambani, drafted as vice-chairman.

This fits well with the broad strategy that RIL will be in the driver’s seat as far as ownership of EIH is concerned, while the Oberois will operate the hotel chain. “It’s a deal between two friends – P R S Oberoi, who needs funds to expand his chain’s footprint abroad, and Ambani, who has the funds, and is happy to let the Oberoi family manage operations,” said a source.

RIL had picked up stake in EIH for over Rs 1,021 crore through wholly-owned subsidiary Reliance Investments & Holding. It bought the shares at Rs 184 each, paying a premium of 22 per cent on the market price. Three days after the deal, the petrochemical giant lost Rs 3,467 crore in market capitalisation, as its share price fell 1.12 per cent to Rs 937.15.

RIL’s scrip ended at Rs 997.70, down 2.11 per cent, and EIH closed at Rs 139.85, down 0.25 per cent, on the Bombay Stock Exchange on Thursday.

“RIL will certainly participate in the rights issue. As shareholders, whatever we are supposed to subscribe to, we would. However, Nita Ambani's appointment on the board depends on EIH's invitation,” said an RIL official.

An EIH spokesperson declined to comment on the rights issue.

One Mumbai-based hospitality analyst said the bifurcation of the properties and management of the chain is in tune with an asset-light model that the hospitality industry has been following.

While RIL and EIH have both maintained the transaction is a long-term financial investment in the luxury hospitality industry, experts differ. “RIL certainly wishes to be a long-term player in the segment. As far as generating cash by EIH for operations is concerned, with a debt-equity ratio of less than 1, EIH could have easily borrowed from lenders at any time,” said an analyst.

EIH Associated Hotels, another hotel company managed by the Oberois, is an equal-stake joint venture between them and the Raheja family, which has interests in real estate, the media and industrial batteries.

Sources said EIH needs money to expand abroad, especially in the US and UK, where EIH has a negligible presence. This is where RIL can help.