Mistry Hotel Spinoff to Cut Debt as U.S. Grows: Corporate India

Investors in Indian Hotels Co., the unprofitable owner of New York’s Pierre hotel, say the company should sell part of its overseas business to trim its debt pile and focus on reviving growth at home.

The luxury chain controlled by Tata Sons Ltd. had 38.18 billion rupees ($602 million) of debt as of March, according to data compiled by Bloomberg. The company, with 22 resorts from the U.S. to Mauritius, reported a loss of 191 million rupees for June quarter as costs increased and said it plans to spin off its foreign holdings by March.

A stake sale will allow Chairman Cyrus Mistry to exploit reviving growth in the U.S. even as India’s $1.8 trillion economy expands at the slowest pace in a decade. The depreciation of the rupee, Asia’s worst performing currency this year, may lure overseas tourists to the nation’s heritage sites such as the Taj Mahal, helping boost revenue at the nation’s hotel operators, according to Krishnakumar Srinivasan, head of equities at Sundaram Asset Management Co.

“We would like them to focus on their Indian assets rather than overseas assets, which have been a drag on the balance sheet,” said Nilesh Shetty, an associate fund manager with Quantum Asset Management Co., who added to his holding of Indian Hotels last month. A stake sale “will help unlock value of those assets, de-leverage and improve liquidity.”

The company is working on a restructuring plan to move all its overseas assets into a “step-down subsidiary” and estimates to complete revamping the business by March, Anil Goel executive director for finance at Indian Hotels told reporters on August 12. He didn’t elaborate.

Pierre Rates

Average room rates at the Pierre hotel in New York gained for the first time in three years in the 12 months ended March 31, according to company data. Tariffs rose 4.2 percent to $623, data show. Rates at the company’s Campton Place hotel in San Francisco increased 16.2 percent and St. James Court in London by 15.2 percent in the past two years.

In the U.S., retail sales rose in July for a fourth consecutive month, showing American households are regaining momentum as employment climbs. Banyan Tree Holdings Ltd. to John Pritzker, the billionaire son of Hyatt Hotels’s founder, are betting a revival in the world’s biggest economy will boost travel demand.

Europe Growth

Blackstone Group LP, the largest manager of private-equity real estate funds, has decided to sell its London West Hollywood hotel in California for $195 million, according to a person with knowledge of the deal, while Banyan Tree, a Singapore-based operator of spas and resorts, is seeking to expand its presence in Europe and the Americas.

Pritzker purchased the remaining 50 percent stake in closely held Commune Hotels and Resorts for an undisclosed amount earlier this month.

A report by the European Union’s statistics office in Luxembourg said Aug. 14 that gross domestic product in the 17-nation euro area rose 0.3 percent last quarter after shrinking 0.3 percent in the previous three months. The growth brought to a close six straight quarters of contraction -- the longest stretch since the euro’s debut in 1999.

“There is definitely a big improvement in the U.S. and Europe too is looking better,” said Chennai-based Srinivasan. “If a hotel property has a niche and some kind of a comparative advantage, it will definitely find appetite with private equity and strategic investors overseas.”

Indian Hotels shares plunged 4.6 percent to 40.9 rupees in Mumbai, extending this year’s loss to 35 percent, versus the 8 percent decline in the benchmark S&P BSE Sensex.

Changing Strategy

Mistry is changing strategy from aggressively pursuing acquisitions to “consolidate” the group’s assets, said A.K. Prabhakar, senior vice president of equity research at Anand Rathi Financial Services Ltd.

Former Chairman Ratan Tata sought to expand the group by offering to acquire Orient-Express Hotels Ltd., owner of New York’s 21 Club restaurant and the Hotel Cipriani in Venice. The proposal was rejected by Orient-Express in November, saying the bid undervalued the company.

“Your opportunistic proposal was made at a time when the price of Orient-Express shares has been significantly depressed,” the Hamilton, Bermuda-based company said in a letter to Indian Hotels. “Our board has unanimously concluded that your proposal significantly undervalues Orient-Express, and that now would be a highly disadvantageous time to sell.

The Tata group company offered a premium of 43 percent to Orient-Express’s 20-day average price then. Indian Hotels owns 6.9 percent of Orient-Express.

Final Call

Goel said the board has not taken a final call on whether it wants to pursue Orient-Express with a higher offer.

The hotel operator, which runs the 112-year-old Taj Mahal Hotel in Mumbai, narrowed its group loss for the June quarter to 190.9 million rupees from 333.6 million rupees last year on higher sales and lower finance costs. The company’s finance costs fell 10 percent to 393.7 million rupees, data show.

The company is looking to sell stakes in its overseas assets to pare debt and bolster earnings to counter the ‘‘dismal performance of the domestic business,” said Sumant Kumar, a Mumbai-based analyst with Elara Securities (India) Pvt., who upgraded his recommendation for the stock to buy on Aug. 13. “This will change the game for Indian Hotels. It will be a huge positive.”

Indian Hotels has opened two new hotels with 175 rooms in India since April and plans to add 1,575 rooms across 12 domestic properties by March next year, according to an Aug. 12 company presentation. Another 1,553 rooms are planned for the year ending March 2015 in Asia’s No. 3 economy, it added.

India Plans

The oversupply of Indian hotel rooms, which increased 24 percent in the year through March and lagging behind demand by 3 percentage points, isn’t deterring the company from building more, Raymond Bickson, managing director of Indian Hotels said at a briefing on May 30. India has 200,000 rooms versus 5 million in the U.S., which has a smaller population, and 3 million in China, according to Bickson.

“India is outpacing the growth of many other economies,” he told reporters. “We still need a lot of convention facilities, hotels, rooms to keep up with that.”

The rupee has crashed about 28 percent to 63.42 per dollar in the past two years, the biggest tumble since the government pledged gold reserves in exchange for loans from the International Monetary Fund in 1991. UBS AG is predicting that a drop to 70 is possible.

That will have a “positive rub-off” on the domestic operations of companies that run luxury hotels and resorts, according to Sundaram’s Srinivasan.

The hotel industries average luxury room rates slipped 18 percent in the four years through 2012, while a brutal gang rape in New Delhi last year deterred women visitors.

“The earlier strategy helped in scaling up the business while the current strategy will help them in making the business profitable,” said Prabhakar. “It seems the wise thing to do.”

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