Bloomberg News

Orient-Express Seen Passing Up Highest Premium: Real M&A

October 28, 2012

Traders are betting that Orient- Express Hotels Ltd. (OEH:US), owner of Manhattan’s 21 Club and luxury lodgings from Venice to Rio de Janeiro, will turn down the highest takeover premium in the hotel industry.

Indian Hotels Co., a shareholder of the Hamilton, Bermuda- based hotel owner, offered this month to purchase the rest of the company’s publicly traded Class A shares for $12.63 each. The unsolicited bid was 43 percent higher than Orient-Express’s 20-day average price, a record premium for the industry, and valued the company at the highest earnings multiple in six years for a hotel takeover, according to data compiled by Bloomberg.

While shares (OEH:US) of Orient-Express had their biggest gain in more than three years on news of the Oct. 18 offer, the stock is languishing almost 9 percent below the offer, evidence that traders who bet on mergers and acquisitions see the company’s board rejecting the bid, according to FBN Securities Inc. Public shareholders don’t have the majority of voting rights, and the company already rebuffed previous overtures from Indian Hotels (IH) and turned down a $60-a-share takeover offer in 2007 when Orient-Express was trading near an all-time high.

“Most experienced arbs on the Street have been through this rodeo more than once,” Yemi Oshodi, New York-based managing director of mergers and acquisitions and special situations at WallachBeth Capital LLC, said in a telephone interview. “We all lost money the first time, we’re not about to lose money again. Until we see a friendly deal on the table, nobody is touching this thing.”

Hotel Cipriani

Victoria Legg, a spokeswoman for Orient-Express, declined to comment on Indian Hotels’s bid beyond the company’s Oct. 18 statement that it would “evaluate the proposal carefully and respond in due course.” Representatives for Indian Hotels, a unit of Mumbai-based Tata Group, didn’t respond to messages and e-mails left after normal business hours.

Orient-Express owns and operates luxury hotels, trains, cruises and restaurants worldwide including the Hotel Cipriani in Venice, the Copacabana Palace in Rio de Janeiro and the Venice Simplon-Orient Express train. The company’s shares, which peaked at $64.80 in October 2007 before the global financial crisis, have since plunged 82 percent as the company posted four straight annual net losses (OEH:US).

On Oct. 18, Orient-Express received an unsolicited bid from Indian Hotels and its affiliates of $12.63 in cash for the 93.1 percent of Class A shares the investor didn’t already own.

The bid, also backed in part by Italian fund manager Montezemolo & Partners, represents a 43 percent premium to the average price of Orient-Express in the 20 days before Oct. 18, almost double the average 22 percent paid on deals for hotel and motel operators of $1 billion or more, according to data compiled by Bloomberg.

Earnings Multiple

Including net debt (OEH:US), the offer values Orient-Express at 24 times earnings before interest, taxes, depreciation and amortization, the highest since 2006, the data show.

After surging by the most since March 2009 on news of the bid, Orient-Express shares (OEH:US) ended Oct. 18 below the offer price, where they have stayed since.

The stock closed last week at $11.55, 8.6 percent below the offer price, signaling traders are skeptical the deal will go through, said Kathleen Renck, New York-based head of event- driven research at FBN Securities. Because Orient-Express’s corporate structure keeps most of the voting power out of the hands of public shareholders, an unsolicited offer is less likely to succeed, she said.

A company subsidiary, Orient-Express Holdings 1 Ltd., owns all of the non-public Class B shares and controls 64 percent of the voting rights. That subsidiary has four directors who decide how to vote its interests. Two of those directors also sit on the board (OEH:US)of the parent company.

Deal History

“If you don’t get agreement with the board of directors, who have all the power, then you can’t buy the company, no matter what the price is,” Renck said in a phone interview.

Orient-Express has rejected deals in the past, including overtures by Indian Hotels.

In September 2007, Indian Hotels sought a potential alliance with Orient-Express, which turned down the invitation, saying that it intended to remain an independent company. A month later, the company rebuffed a $2.55 billion takeover offer from Dubai Holding Commercial Operations Group LLC. Orient- Express said its corporate structure enabled it to block any undesired buyout offers and it would make “full use of this authority” as it rejected the $60-a-share offer.

The dual-class structure was challenged in 2009 by then- shareholders D.E. Shaw & Co. and CR Intrinsic Investments LLC in the Supreme Court of Bermuda, which ruled the following year in favor of Orient-Express.

‘Plan B’

The Orient-Express board may reject the bid from Indian Hotels in the belief it can do a better job rehabilitating the company and its stalling stock price on its own, said Chris Agnew, a Stamford, Connecticut-based analyst at MKM Partners LLC. The company has said it will divest less-profitable assets and reduce net debt as part of efforts to boost results.

“They’ve obviously outlined a plan where they think they can create value so it’s not like they’ve only got plan A, which is sell the company,” Agnew said in a phone interview. “They’re not desperate. They have a plan B, so they’re more than likely to rebuff the offer.”

The Financial Times reported Oct. 25 that Orient-Express is likely to appoint a new chief executive officer this week, citing people familiar with the company.

Albert Saporta, managing director at Geneva and Tel-Aviv- based Alternative Investment Management & Research SA, said Orient-Express may also view Indian Hotels’s offer as too low, given the company’s landmark properties.

Higher Value

Orient-Express owns “some of the best hotels, most famous hotels in the world,” he said in a phone interview. Management wouldn’t “blink their eyes” at an offer less than $15 a share, and the value of the company’s assets may justify bids as high as $20 a share.

Indian Hotels Vice Chairman R.K. Krishna Kumar wrote last week to Orient-Express Chairman J. Robert Lovejoy, asking to meet with him and the board to address any “value-drivers of which we may not be aware” regarding the hotel company.

“To date, we have only had access to public information and, as such, our offer was informed only by this limited data,” Kumar said. He also said Tata Group Chairman Ratan Tata and Luca Montezemolo would be willing to meet as well.

Christopher Jones, a New York-based analyst at Telsey Advisory Group, said Indian Hotels might be willing to increase its bid.

For Indian Hotels, “it would be very beneficial to be able to enroll some of these hotels into their portfolio,” Jones said in a phone interview. “It would certainly give a shot in the arm to a sort of high-end luxury Indian lodging company.”

Other Bidders

The offer from Indian Hotels could also put the company into play for other bidders, Jones said. Billionaires David and Simon Reuben may bid for Orient-Express, the Sunday Times reported on Oct. 21, without saying where it got the information.

“Everything is on the table,” Gerald McKelvey, a spokesman for Reuben Brothers, said in a phone interview last week.

With Orient-Express’s stock still languishing, a deal might be the best option for the company, said Boniface “Buzz” Zaino, a New York-based money manager at Royce & Associates LLC, which oversees about $36 billion, including Orient-Express shares (OEH:US).

‘For Sale’

“I would go to a banker and say, ‘Put it up for sale,’” Zaino said. “Take the paper out of the vault and see who would be willing to pay a price for it and then evaluate it and if you get a higher number, you could be a lot happier than the current offer.”

Still, until the company shows interest in a sale, any deal is unlikely, however many suitors there may be, said Oshodi of WallachBeth.

“If they were to put this up for sale, there would be just tons of buyers,” he said. “We all know what it is worth. It’s worth way more. I could see $20, $25, whatever, in a friendly deal, but you have to convince them to sell. If they say they are not selling, there is nothing you can do about this.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net


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