The Street continues to be perplexed by Reliance Industries’ (RIL) decision to take up 14.12% equity stake in East India Hotels Ltd (EIH).
“It just doesn’t make sense in many ways,” is a frequent refrain one hears.
Marketmen say the white knight buzz — where RIL counters the holding ITC has in EIH — does not add up. It would have made more sense for Biki Oberoi to purchase EIH shares from the open market than to divest a 14.12% equity stake in that case, they reason.
Second, promoters of companies do not let go of their equity holding very easily, unless two things take place. One is that they lose interest in the business. The other is they need the money urgently to grow or to stay in business.
PRS or Biki Oberoi has been closely involved with EIH. If he wanted to give up his company, why would he sell only a part of his holding?
Nor is EIH cash-strapped. It has decent cashflows, in fact. And it has a debt:equity ratio of less than 1, allowing it to borrow over Rs1,000 crore any time it wants.
None of these check out rationally, say marketmen. So, could it be that RIL invested in EIH to give Biki Oberoi a large cash trove which could be used to pay off kin keen on filling in the hospitality legend’s shoes when he retires? That’s one line of speculation.
After all, Biki Oberoi has refrained from naming his successor. Could he have approached RIL to bail him out with cash with which the contenders could be asked to start their own respective businesses?
Plausible argument, but for the fact that Mukesh Ambani would not have done this deal without realising the impact it would have on RIL’s market capitalisation.
Three days after the deal, RIL has lost Rs3,467 crore in market capitalisation — or three-and-a-half times what it paid for the EIH stake — because the share price fell 1.12% to Rs937.15.
As everyone knows too well, Ambani could not have been unaware of the negative fallout. Then why did he do the deal? And why would RIL, which never invests in a business unless it has control, be willing to pick up just 14.12% in EIH?
The amount involved is so small, given the huge warchest of cash that RIL has, that it does not even make sense as an investment decision. And why pay a hefty premium of 22% on the market price of the EIH share as well?
No wonder the street is scratching its collective head.
Here’s one more tantalising grist to the rumour mill: Could it be that the Indian equity purchase is only a part of the deal? That a bigger chunk of the equity may be transferred to various entities in the near future so that the ownership passes from the hands of the Oberoi family to the new set of owners without invoking the Sebi Takeover Code and an open offer that would ensue?
A de facto call option for Mukesh Ambani, as it were?
It is only then that the investment would make sense in terms of how control cascades seamlessly to Ambani.
However, this, too, remains in the realm of speculation, because none from EIH or RIL is willing to answer any question.
Any more guesses?
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