Reliance Industries has acquired a 14.12% stake in East India Hotels, which runs the Oberoi and Trident hotels, for Rs10.2bn (£140m).
RIL, which counts Mukesh Ambani, reportedly Asia's richest man, as its chairman and MD, said that the investment had been made as a result of EIH's "excellent future prospects". It came as EIH was facing a possible takeover threat from rival hotel group ITC, which holds a 14.98% stake.
RIL was quick to say that it would support the existing management of EIH and had "full faith" in it, although it is rumoured that Ambani's wife Nita could be offered a seat on the board. She has been taking an increasingly-public role in RIH, through its school, healthcare and sporting initiatives and is thought to be interested in India's underdeveloped services sector.
Oberoi returned the support, calling RIL a "strong and progressive" company that he was happy to encourage as an investor. The founders of EIH are expected to further protect themselves from ITC, which has been shadowing the group for the past year, by increasing their stake in the company from 46.4%.
EIH's current management team is led by chairman and CEO, Prithvi Raj Singh Oberoi, son of its founder, Mohan Singh Oberoi. Known as ‘Biki', he has received lifetime achievement awards crediting his business leadership skills from organisations around the world, hailing his achievement in building up the Oberoi brand, and also implying that the time to hand over control may be near.
The Oberoi Group, founded in 1934, now operates 28 hotels and three cruisers in five countries under the luxury Oberoi and five-star Trident brands. With PRS Oberoi now into his 80s and recently facing threats from within the ranks of its shareholders, the question of succession has been once again raised at the group.
Oberoi's son Vikram Oberoi and nephew Arjun Oberoi are both joint managing directors of EIH and seen likely to stay close to the family business. PRS Oberoi is, however, seemingly in no hurry to relinquish power.
He is currently two years away from the end of a five-year extension to his chairmanship, granted in 2007, giving the group a deadline. At the company's recent AGM, he responded to questions about a successor by saying: "I think about it all the time. I intend to do something at an appropriate time..maybe in a year or two".
Also at the AGM, which took place prior to RIL's acquisition, the chairman and CEO said that it was looking for a partner to grow the business together "someone who believes in the ideology of Oberoi and Trident and who can invest in real estate". The group had been linked to Analjit Singh, chairman of healthcare and insurance group Max India, until the RIL sale was announced.
EIH is planning to expand its hotel management business, which currently encompasses only two hotels, as a fast way to build its estate with the minimum of outlay. The group plans to invest 1.5 billion rupees (£21m) over the next two years on new projects, and has spoken of plans to have half its portfolio under management within the next five years. It will stick with its current two brands, with no plans to add a third, and has dismissed franchising as part of its strategy.
The company is looking outside its domestic market, planning to acquire management contracts for properties in London, Paris, New York, Shanghai, Beijing and Bangkok. Oberoi commented at a press conference: "We own too much property. In the long-term, it is not too good to own so much property. All our projects either domestic or abroad at present under construction or development are all under management contracts."
It has been speculated that EIH may transfer the properties under management to EIH Associated Hotels – a joint venture with the Rajan Raheja group – with the two cousins taking charge of one each as part of the succession strategy.
Over the last few years, there have been reports of several properties being transferred from EIH to EIH Associated Hotels, however, EIH vice-chairman S.S. Mukherji is quoted as saying "those transfers had nothing to do with the Oberoi family's succession plan". At the AGM the chairman would not be drawn on the issue, commenting "nothing is impossible".
The group has found that last two and half years challenging due to the global financial crisis and the Mumbai terrorist attack, which affected two of its hotels. At the AGM Oberoi said he was confident about the future, with demand for hotel rooms expected to grow in the financial year to March. Room rates are expected to begin to improve in the third quarter, although inflation is expected to hit margins.
HA Perspective: For RIL, the investment in EIH gives them a stake in India's expanding hospitality sector at a time when its core energy-driven business looks to be slowing. It is expected that RIL will invest in properties that EIH will then manage. EIH must now hope that its newest shareholder, which has a reputation for having an aggressive investment strategy, is satisfied with its plans.