Indian Hotels shares fall 5.5 per cent to 66.35 on Orient Express takeover bid

MUMBAI: Shares of Indian Hotels fell nearly 5.5% to 66.35 on Friday on concerns its financial health will deteriorate if it ends up buying US-based hotel chain Orient-Express Hotels for which it made a bid of $1.8 billion ( 10,000 crore). Investors are worried that a buyout of loss-making Orient could increase the Tata Group firm's debt, which was about 3,000 crore in FY12.
"If the deal goes through, it will strain Indian Hotels' profitability. Orient Express' financial performance has not been good, it had a loss of 410 crore in 2011 and has revenue growth has been under 5%," said Rashesh Shah, analyst at ICICIBSE -0.86 % direct.
"High debt, low profitability and poor visibility of earnings front could keep the view negative for the next 2-3 years," he said.
IHC said on Thursday that it will pay $12.63 per share for Orient, a nearly 40% above its latest closing price. Orient-Express runs high-end hotels, resorts and luxury trains in the US, Europe, South America, Africa and S-E Asia.
Brokers said that though concerns over poor returns from the acquisition could continue over a few years, long-term investors see this as a positive for Indian Hotels.
"The market has been taking a negative view of companies that have made acquisition bids outside the country in the last 2-3 years, as the funding requirement puts pressure on balance sheet and profit and loss," said Mehraboon Irani, head - private client group at Nirmal Bang.
"But this deal is a long-term positive for the company. Hotels are capital intensive and returns do take some time - even ITC ran hotels in losses in the first few years," he said.
The stock's prospects will depend on how institutional shareholders of the company perceive the proposed acquisition. Some of the major institutional investors in IHC include several insurance companies such as LIC, General Insurance and SBI Life Insurance.