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Tatas and allies bid for Orient

Mumbai, Oct. 18: The Tatas today mounted a fresh bid for Orient Express — the Bermuda-based luxury hotel chain that had warded off their overture in December 2007 — with an all-cash offer to acquire all the outstanding Class A shares in the company for $1.86 billion.

This time they have two partners backing their bid: Ferrari chairman Luca Cordero di Montezomolo and, strangely enough, Paul White, the former chief executive of Orient Express, who had rudely spurned their bid for a grand alliance five years ago.

White had been forced out of Orient Express in a boardroom shuffle some months ago.

White’s association with the Tatas marks a remarkable turnaround. In a letter to R.K. Krishna Kumar, Indian Hotels’ vice-chairman and Tata Sons’ director, in December 2007, White had brusquely said: “We believe any association of our luxury brands and properties with your (Tatas) brands and properties would result in a reduction in the value of our brands.”

The Tatas have now offered $12.63 per Class A share in Orient Express, which represents a 40 per cent premium on Wednesday’s closing price of $9.02 a share. Late this evening, the Orient Express stock jumped 23 per cent to $11.09 on the New York Stock Exchange.

The Montezomolo family will invest $100 million for a minority stake in the hotel chain through Charme II, a special fund created by Montezomolo & Partners that invests in leading companies with strong ties to Italy.

The Tatas had made a fresh overture on August 15 when they met Philip R. Mengel, interim chief executive officer of Orient Express Hotels. But they were told that the Orient Express board of directors was not interested in exploring a transaction.

In a letter to Mengel on Thursday, Krishna Kumar said: “We are proposing an alternative transaction whereby Tata entities would acquire all of the outstanding shares of Orient Express Hotels for $12.63 per share in cash… we believe this offer is in the best interests of Orient Express Hotels and its shareholders.”

“We would have preferred to continue these discussions confidentially and outside the public domain with the goal of expeditiously reaching a mutually beneficial agreement. However, as a significant shareholder of the company, US securities laws requirements necessitate that we publicly disclose our offer to you,” Krishna Kumar said in the letter.

Indian Hotels holds about 7 per cent of Orient Express Class A stock. In December 2007, its stake had risen to 11.5 per cent when it bought the stock in phases, at times paying as much as $60 a share. In 2007, the Tatas had spent about $300 million to corner the Orient Express shares.

A poison pill mechanism devised by Orient Express at that time created a special class of super-voting Class B shares that slashed the voting rights of the Tatas and two other hedge funds that had also bought into the company. Orient Express was also able to ward off a legal challenge from the two hedge funds against its poison pill and other corporate governance practices.

The bid by the Tatas comes at a time Europe is going through turmoil over the mounting sovereign debt of several nations. The economic crisis in Europe has badly bruised the hospitality industry — a point that Krishna Kumar emphasised in his letter to Mengel.

He said: “We believe this premium cash offer represents a compelling value proposition… especially in light of the current fragile state of the global economy and the lack of clarity about the prospects for recovery.”

The letter said the Tatas would be able to provide additional investments to preserve the quality of assets of Orient Express Hotels and help expand its footprint.

Krishna Kumar promised that the new Orient Express Hotels would “continue to remain an independent company… with a standalone management and board of directors under the broader Tata umbrella”.

The Tatas said they had secured the financing to back their offer. This would come in the form of equity from the Tata entities as well as debt financing from the Bank of America, ICICI Bank and Standard Chartered Bank.

The letter added that the Tatas expected co-operation from the Orient Express management to complete the due diligence process quickly.

The Tatas have appointed Bank of America Merrill Lynch as the financial adviser and Shearman & Sterling LLO as legal adviser. Hotel Advisor (UK) Ltd — an affiliate of Paul White — will also provide assistance to sew up this transaction.

It appears that Paul White will manage Orient Express if the Tatas and the Montezomolo family pull off this deal.

The parties also filed an interim investors’ agreement under which the Tatas, Montezomolo’s Charme II fund and Paul White agreed to create an acquisition vehicle, or a “parent”, to conclude the transaction. This entity may spawn intermediate holding companies to be incorporated in the Bermuda and other jurisdictions with the consent of all the investors.

Until the shareholders' agreement becomes effective, the parent entity’s board will comprise four directors: two will be designated by Indian Hotels and one each by the Montezomolo family and Paul White.

The partners have agreed that Paul White will be granted equity compensation. Stocks may also be provided to employees that he identifies. The investors will also negotiate employment agreements with Paul White and the employees he brings on board.

In the 2007 letter, White had also said Orient Express did not believe that there was a “strategic fit between your predominantly domestic Indian hotel chain and our global portfolio of luxury hotels and unique travel experiences”.

That letter provoked Krishna Kumar to seek an unqualified apology from him that never came.

One often hears that there are no permanent foes in politics. It appears the rule holds true in business as well.