Cheap rights issue set to heat up battle for EIH

The battle for EIH Ltd, India’s second-biggest premium hotel chain, seems to be intensifying.

The company on Friday informed the Bombay Stock Exchange (BSE) that its board had approved a rights issue of 178.61 million shares at Rs65 each, which is a 30.5% discount of Friday’s closing price of Rs93.5.

The rights issue, which is an offer to existing shareholders to purchase additional new shares in a company, would make both Reliance Industries (RIL) and ITC —significant shareholders in the company — dig in heels as both would like to maintain their present stakes, said S P Tulsian, an independent stock market analyst.

RIL has a 14.8% stake in EIH, while ITC has 14.96% — just shy of the 15% mark, which triggers an open offer according to the Securities and Exchange Board of India norms.

The Oberoi family holds 32.31% stake.

“It is a very effective price,” said Tulsian. “Initially there was a bit of confusion whether it would be priced higher but with this aggressive pricing, retail investors will also find it very attractive,” he said.

EIH will raise Rs1,161 crore through the rights process, of which Rs900 crore would go for debt repayment and the balance to fund expansion.

The share sale opens on March 1 and closes on March 15.
An RIL spokesperson declined to comment. But a company source said RIL would subscribe to the rights issue to maintain its shareholding.

Since EIH is offering 5 shares for every 11 held, RIL can buy up to 2.64 crore shares because it owned 5.82 crore shares as on December 31 last year. Buying it all up would cost RIL Rs172 crore at Rs65 per share.

The company had paid Rs184 per share in last August to buy its 14.8% stake in EIH for Rs1,021 crore.

Combining the two purchases, the average acquisition cost for RIL would be Rs146.81 per EIH share.

A spokesperson for ITC said the company has “no comments to offer”.

But chairman Y C Deveshwar had surprised everyone last year by saying RIL buying into the EIH does not mean ITC had closed its options.

“Why should it be a closed chapter? Nothing is ever a closed chapter,” he was quoted as saying in October to a business daily, when asked if there could be a takeover battle for EIH between ITC and RIL.

“The takeover battle will get intensified,” said Tulsian, adding that it is now an “Ambani vs ITC” fight.

Analysts said promoter of Max India Ltd, Analjit Singh, who holds a 4% stake in EIH, would no longer be ‘a game-changer’ as ‘he won’t go against the interests of the Oberois’.

Singh’s office did not reply to an email query on his stance now that the rights issue has been announced.

Under current Indian takeover laws, an acquirer is required to make an open offer for at least 20% of a company’s shares if its stake crosses 15%, but under proposed changes, an acquirer can build a 25% stake without making an open offer. It is not known by when the new takeover laws would come into effect.

EIH shares jumped 2.63% to close at Rs.93.5 on the Bombay Stock Exchange on Thursday, while the bourse’s benchmark Sensex index ended 1.52% higher at 19,861 points.