Mumbai, Jan. 20: The Tatas may have no option but to sell the 11.5 per cent stake they picked up in Orient-Express Hotels Ltd (OEH) as the investment has started to lose its value — and there’s no sign yet of a thaw in the frosty relations between the two sides.

Back in December, OEH had rudely slammed the door on R.K. Krishna Kumar’s overture for a global alliance between Indian Hotels Company and the Bermuda-based manager of 50 luxury hotels, restaurants, tourist trains and river cruise properties in 25 countries.

Krishna Kumar, vice-chairman of Indian Hotels, has since maintained that the Tatas would like to wait and watch the developments at OEH, which has gone through a period of turmoil since late 2006 during which founder chairman James Sherwood and stepson Simon Sherwood were forced out of key executive positions at the company.

Kumar is also waiting for an apology from Paul White, president and chief executive officer of OEH, for his harsh and intemperate letter of December 10 which rebuffed the Tatas and seemed to jeer at their offer. In his reply to the OEH rebuff, Krishna Kumar described White’s letter as “pejorative, inaccurate and libellous”.

But even as the Tatas wait and passions cool, the OEH class A share, which is listed on the New York Stock Exchange, has slumped to levels that are almost on a par with those in August last year when Samsara Properties — a Tata group company based in the British Virgin Islands — first started picking up shares in the hotel company.

Last Friday, the OEH stock was quoted at $48.52 per share, which is lower than the average price of $49.73 in the first round of share purchases by the Tatas (see chart).

The Tatas, who have paid a little over $261 million for the 4,880,764 Class A common shares in three bouts of buying since August, now find that the value of the stake has fallen to $236 million — a decline of 9.27 per cent.

Takeover defences

In December, the Tatas paid $60 a share for the last tranche of 234,320 shares. Since then, the OEH stock has fallen over 19 per cent. The chances are that the stock will head lower because of a poison pill proviso that OEH invoked to head off two predators: Indian Hotels and Dubai Holding, which is principally owned by Sheikh Mohammed bin Rashid Al Maktoum of Dubai.

The Tatas had picked up OEH shares as far back as August 17, but Dubai Holding entered the scene only in October. Between October 5 and 9, Dubai Holding acquired 3,911,611 shares, or 9.2 per cent of the Class A shares.

OEH has two classes of shares — the listed Class A common shares and the unlisted Class B stock. While the class B shares carry one vote, 10 class A shares constitute one vote.

After the third tranche of share purchases by the Tatas, the OEH management erected its takeover defences. Earlier, the alarm bells were supposed to sound when anyone acquired 20 per cent of the voting rights; after the December 10 amendment, the defences will be activated when anyone acquires more than 15 per cent of the Class A stock.

Limited options

The change limits the options for the Tatas who have never mounted a hostile takeover till date. Krishna Kumar has denied talks of any sort with Dubai Holding.

In an SEC filing on December 19, the Tatas had listed three options: (a) acquire more shares; (b) sell all or a part of the stake; and (c) start talks with other shareholders of the company, which would include Dubai Holding.

Like Indian Hotels, Dubai Holdings wants to form an alliance with OEH that would cover the hospitality assets of Jumeirah Group, an associate that owns international luxury hotels.

Sticky wicket

The Tata share purchases have been financed by London-based Tata Ltd, which provided a loan of $300 million to Samsara Properties at an interest rate of 6.25 per cent.

Cold business logic suggests that the Tatas will be better off getting out of this sticky situation: they can’t forge an alliance with OEH and the value of the investment is eroding. But it will also be hard to find a buyer for the shares in the light of the OEH poison pill.

Deal a dozen

The Tatas have always been able to swing deals: the talks with Ford Motor Company on the sale of Jaguar and Land Rover marques have entered the final stage. Exactly a year ago, they paid $12 billion for Corus Steel — the biggest overseas acquisition by any Indian company.

Even when they have walked away, they have made a neat little pile of money. In August 2006, the Tatas had picked up a 30 per cent stake in Energy Brands of the US — the makers of Glaceau vitamin water — for $677 million. In May 2007, Coca-Cola decided to buy out Energy Brands for $4.1 billion. It paid the Tatas $1.2 billion for their 30 per cent stake.

If they now scrap the plan for an alliance with OEH and sell their stake, it will be the only deal where the Tatas would have to walk away with no real gains.

An apology from White might be the only way to save face.