Indian Hotel Group expands footprint
A report in the Economic Times in India says that Indian Hotels’ purchase of a 10% stake in Orient-Express Hotels for $211 million is a continuation of its current overseas strategy.
The report says that Indian Hotels Company (IHC), which operates under the ‘Taj Hotels and Palaces’ brand, clearly has a penchant for iconic properties and companies.
It currently manages The Pierre, New York under a 30-year management contract and it acquired the Blue Sydney (earlier known as ‘W’) for Australian $36 million in January 2006 and the Ritz Carlton, Boston (now Taj Boston) for $170 million earlier this year.
It is possible that the Taj name, the ultimate symbol of the Orient, may be grafted on to the Orient-Express brand sometime in the future though this is not on the cards right now.
On Tuesday the Orient Express company seemed to indicate that it was not interested in an alliance and that it had no prior information on Indian Hotels buying a stake. It’s not clear if this is a hostile takeover situation.
A price of $211 million for a 10% stake would mean that the Orient-Express Hotels might be valued at over $2 billion. A buyout would catapult the Taj brand into the ranks of the world’s leading luxury hotel brands.
Managing foreign buys remains an issue. Indian Hotels’ subsidiaries (both domestic and foreign) account for 40% of its revenues but only 18% of its bottom line, according to analyst estimates. International subsidiaries currently contribute around 20% of the revenues, but properties like St James Court (London) and the Pierre have been a drag on the margins in recent years.
IHC is in the process of adding around 2,000 rooms in India over a two-year period ending December 2008, at a capital expenditure of around Rs 1,000 crore. It is also expanding in the budget hotels segment in India. IHC is India’s largest hotel company, in a country where tourism is growing rapidly. It has EBITA margins of over 30%, a reflection of the shortage of quality hotel rooms in India.
It may seem surprising that it wants to expand abroad. But unlike IT there is nothing much in the hotel industry that can be outsourced to India though it may be possible, if labour norms are relaxed, to do a reverse BPO of sorts by sending Indian managers and staff abroad. Labour costs can be 50% of total costs in developed markets. Since much movement of labour is difficult, the overseas acquisitions serve to spread risk across markets.
Report by The Mole and the Economic Times
John Alwyn-Jones
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