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Taj Hotels seeks takeover of Orient-Express

Published by Current on 2007-10-10

Ratan N. Tata, chairman of India's leading corporate conglomerate Tata Sons, is in an expansionist mood. At 69, he wants to extend Tata's brand globally. He wants to leave as his legacy an institution that's a powerhouse among multinationals, and not just a leading corporate player in his own country.

Because luxury hotels have long been Tata's trademark - ever since the opening of the fabled Taj Mahal Palace Hotel in Bombay in 1903 - Ratan Tata is particularly eager to acquire high-end properties around the world. His strategy had been to obtain management contracts, but now Tata seems to want to acquire properties outright. He has already bought 10 percent in Orient-Express Hotels for an estimated $211.28 million through Samsara properties, a wholly owned subsidiary of Tata's main hotels division, Indian Hotels Company Limited (IHCL).

Ratan Tata's ambition is to create a strategic alliance that, as the company puts it, "is aimed at leveraging global networks and building brand equity for both companies in a unique relationship." Orient-Express Hotels owns - fully or partly - and manages 35 hotels in 25 countries, besides luxury trains and cruises. Those who know Tata well say that the investment in Orient-Express is only a prelude to a takeover of the entire company. Management of Orient-Express is resisting Tata's overtures.

But it may not be able to resist for long. The Tata Group is one of India's largest business conglomerates, with revenues in 2007 of $22 billion, the equivalent of about 2.8 per cent of India's GDP; its market capitalization was $70 billion as of October 5, 2007, and its 28 publicly listed enterprises - which include some 96 operating entities - have more than two million shareholders. Rata Tata often likes to point out that the Tata Group has operations in more than 85 countries across six continents, and that its companies export products and services to 80 countries.

While Tata comes across as a polite, aristocratic negotiator, he's about as tough and relentless as they come. Tata has been the chairman of Tata Sons, the holding company of the Tata Group, since 1991. He is also the chairman of the major Tata companies including Tata Motors, Tata Steel, Tata Consultancy Services, Tata Power, Tata Tea, Tata Chemicals, Indian Hotels, Tata Teleservices and Tata AutoComp. During his tenure, the Group's revenues have grown over six-fold to the current figure of $22 billion.

"India has tremendous investment potential across a very wide variety of sectors, due to our relatively early stage of economic development. If you look at the per capita consumption practically of any item, there is potential for large increases over the next few decades as the economy grows and per capita incomes increase," Tata said in a recent interview.

"You see this potential reflected in the investment plans of many Tata companies - we plan to expand capacity many-fold in sectors ranging from auto, steel to hotels and power," he added.

Another factor behind his current "expansionist" mode is Tata's intense rivalry with India's other big luxury-hotel chain, The Oberoi Group. In addition to such acclaimed properties as the Amar Vilas and Raj Vilas in India - much lauded by Travel & Leisure Magazine, and Architectural Digest -- Oberoi has hotels throughout the Middle East, Southeast Asia, and Australia. Now Oberoi wants to establish itself in the United States, and Ratan Tata wants to outmaneuver Oberoi's aging - but still energetic --chairman, the family patriarch P. R. S. "Biki" Oberoi.

The Oberoi Group, founded in 1934 by Oberoi's doughty father, the late Mohan Singh Oberoi - who was born in 1898 and who started his career as a lowly employee in the fabled Cecil Hotel in India's hill station resort of Shimla -- owns or manages 32 hotels and luxury cruisers in five countries under the "Oberoi Hotels & Resorts" and "Trident Hilton" brands.

According to its literature, the Group is also engaged in flight catering, airport restaurants, travel and tour services, car rentals, project management and corporate air charters. In October 2003, it entered into a strategic alliance for the Trident Hotels with Hilton International Co. This alliance presently covers eight hotels with approximately 1,900 rooms across India under the "Trident Hilton" brand. The Group also operates Trident Hotels in the Saudi Arabian cities of Jeddah and Khamis Mashayt.

Asked about his Group's progress, particularly in the context of India's current economic boom, Oberoi said: "India has seen dramatic changes in the recent past. The economy has witnessed unprecedented growth and this has in turn assisted industries like ours to make a larger contribution to the country's economic development. This, in basic terms, translates into increased foreign exchange earnings due to the sharp rise in the number of foreign visitors but it also testifies to the fact that India has become an attractive tourist and business destination.

"The worldwide interest in India is drawing a range of visitors we have not seen before," he continued. "They are captivated by the country's ancient heritage and culture and are equally enthralled by its modern face. The visitors would be fewer if we did not have the facilities to cater to the discerning international travelers in an increasingly globalized world. These are travelers and business leaders who are accustomed to high standards of service and comfort combined with modern technology and facilities. A good hotel experience often translates into a favorable impression of the country as a whole. Today, we are attracting global leaders, entrepreneurs, foreign investors, business collaborators and global brands who are for the first time, looking to commence operations in India.

"If there were no world class hotels, where would they stay? In today's economic environment, we as a country and an industry have the opportunity to rise to heights we only dreamed of in the past. This speaks volumes for the progress that is possible with forward-looking government policies," Oberoi said. "Today's international corporate leaders are global citizens, used to the best hotels in the world, and they are extremely demanding. The hospitality industry and, in particular, hotel groups like ours that offer high standards of service and accommodation and have established an international reputation are playing a significant role in not just adequately catering to their needs but enhancing their impression and experience of the country."

His passion for hotels and hospitality notwithstanding, Oberoi faces a formidable competitor in Ratan Tata, not the least because Tata's conglomerate - unlike The Oberoi Group - encompasses sectors beyond hotels and hospitality. For example, on April 2, 2007, Tata acquired Europe's Corus Steel - which had been formed in 1999 through the merger of British Steel and Koninklijke Hoogovens -- to complement Tata Steel in a $11 billion deal, making Corus a subsidiary of the Tata empire, and Tata-Corus the world's fifth biggest maker of steel products.

The Indian Hotels Company and its subsidiaries are collectively known as Taj Hotels Resorts and Palaces. The group owns 59 hotels at 40 locations across India with an additional 17 international hotels in the Maldives, Mauritius, Malaysia, United Kingdom, United States, Bhutan, Sri Lanka, Africa, the Middle East and Australia. From the 1970s through the 1990s, the Taj played an important role in reviving several of India's key tourist destinations.

It bought decaying palaces of India's defrocked maharajahs, and transformed them into super-luxury hotels. In cooperation with the Indian government, the Taj developed resorts and retreats while the government developed roads and railways to India's hidden treasures. Taj Hotels Resorts and Palaces is grouped into "Luxury," "Leisure," and "Business" categories to provide consistency across the different hotels and standardize products and services, according to company officials.

The Tata Group also pioneered the concept of high-end beach hotels in India. In 1974, the Taj opened India's first international beach resort -- Fort Aguada Beach Resort -- in Goa. Today, Goa is one of South Asia's most popular beach resort destinations, according to Travel & Leisure Magazine. Tata officials say that the presence of Taj Hotels Resorts and Palaces internationally has been developed through a network of Taj regional sales and PR offices in the United Kingdom, France, Germany, Italy, Dubai, Singapore, Sydney, Tokyo and the US.

According to the literature, Taj Hotels strengthened its presence in the Indian Ocean rim in the last two or three years. Taj Exotica Resort & Spa, Mauritius, opened its doors to guests. An entirely renovated and upgraded Taj Exotica Resort & Spa was opened in the Maldives. Taj Hotels further expanded its global footprint by securing management contracts at Palm Island, Jumeirah in Dubai, Langkawi in Malaysia and Thimpu in Bhutan.

The most publicized addition to Tata's portfolio has been The Pierre, the iconic landmark hotel on New York's Fifth Avenue. Last year, Tata bought the Ritz-Carlton in Boston, and re-named it the Taj Boston. It also acquired San Francisco's 110-room boutique hotel, Campton Place Hotel, for $58 million earlier this year from the Kor Group. Ratan Tata has entrusted much of the American expansion to IHCL's managing director, the Hawaii-born Raymond Bickson, who was a mid-level hotel executive in Manhattan until he was hired in 2003 by Tata. Ratan Tata - a lifelong bachelor - reportedly has an extremely close relationship with Bickson, although Bickson is not particularly well regarded within the Tata Group for his management skills or style.

In addition to its hotel, the Tata Group operates Taj Air, a luxury private jet operation with state-of-the-art Falcon 2000 aircrafts designed by Dassault Aviation, France; and Taj Yachts, two 3-bedroom luxury yachts which can be used by guests in Mumbai and Kochi, in Kerala. It also operates Taj Sats Air Catering, the largest airline catering service in South Asia, as a joint venture with Singapore Airport Terminal Services, a subsidiary of Singapore Airlines.

Tata has made forays into real estate as well under Ratan Tata's stewardship of Tata Sons. For example, Taj Wellington Mews Luxury Residences is a complex of 80 luxurious serviced apartments in South Mumbai. Taj Hotels Resorts and Palaces established the Indian Institute of Hotel Management, Aurangabad in 1993. The institute offers a three-year diploma, designed with the help of international faculty and has affiliations with several American and European programs.

Finally, the Tata family members are India's biggest philanthropists. The hotel group continually emphasizes corporate social responsibility. It focuses on generating employment and education, particularly for women, craftsmen and artisans. The education of children in communities near Tata properties is another major enterprise. Employees of all hotels and the corporate offices contribute and actively participate in numerous on-going events and projects.

Although the remote Raymond Bickson is the hotel group's managing director, the entire enterprise is run on a day-to-day basis by R. K. Krishna Kumar, whose notional title is vice chairman of Tata Sons. Krishna Kumar is a savvy, wily operator who's highly respected in India's corporate circles. He isn't very accessible to the media, preferring to leave it to Ratan Tata to get the headlines.

In a recent statement concerning Orient-Express, Krishna Kumar said: "Over the past few years, we have pursued the objective of growing the Taj brand internationally. As part of this strategy, we have been pursuing alliances and relationships with leading hotel groups that have not yet set up a presence in India, but have secured leadership positions in various geographies. This move is in line with our plans and we look forward to pursuing a possible association between IHCL and the company that has earned a great reputation for its outstanding ultra luxury hotels, trains and cruises.

"The possible combination of the two brands will create a powerful competitive advantage," Krishna Kumar continued. "The synergies which can be developed will strongly leverage the huge opportunity in the global market as also the exploding Indian hospitality industry. We are committed to working together in a friendly and supportive manner with Orient-Express Hotels."

Much could be read into that statement, but perhaps the most telling aspect is the warning that Krishna Kumar issues about "cooperation." Since Tata has the cash and the ambition, the group is certain to pursue Orient-Express with zeal. Orient-Express executives have declined to comment.

Krishna Kumar was brought in by Tata after the hotel group's previous head, Ajit Kerkar, was dismissed after a long tenure. It was Kerkar who began the group's foreign expansion in the 1970's, with the acquisition of what was then called the Hotel Lexington in Manhattan, a facility known to rent rooms out by the hour. He transformed it into a cash cow. (The Hotel Lexington has since been sold to the Khimjee Group of Houston, and is now run under the rubric of the Radisson.) Kerkar also purchased the Hotel St. James in London, and upgraded it significantly - so much so that Queen Elizabeth II and Prince Charles attended a banquet hosted by Kerkar at the hotel to mark India's 50th independence anniversary in 1998.

But Kerkar was bedeviled with suspicions of corruption and nepotism throughout his long reign, and never got along with Ratan Tata. It was Tata who personally fired Kerkar. Kerkar's heir apparent, Leonard "Lenny" Menezes, was also let go. But Menezes has landed on his feet, and now runs Hilton Hotels Asia operations out of Mumbai and Goa.

A Menezes protege, Sam Bhadha, also left the Taj Group, after a successful career running the Taj Hotel in Mumbai, the St. James's Hotel (now the Crowne Plaza) in London, and the Hotel Lexington in New York. Bhadha is currently in charge of the Khimjee Group's 10,000 hotel rooms in Manhattan, representing a fifth of all hotel rooms in New York. His departure from Tata was a real loss, and points to the group's inability to hold on to top-level managers.

Still another departure was Ravi Dubey, the brains behind the success of Tata's Taj Mansingh Hotel in New Delhi. While the Tata family likes to say that corporate harmony is a major characteristic of the conglomerate, the in-house politics of the group are comparable to those of the Borgia and Medici families of medieval Italy. Ratan Tata has got rid of virtually every top manager who served under the late J. R. D. Tata, the creator of the modern Tata Group - and one of the founders of Air India, India's national carrier - and is now trying to assemble a young team of managers, including non-Indians recruited in the United States and Britain. There's little doubt that even as he tries to acquire Orient-Express through cash, Tata will also attempt to poach on its management.

It needs more managerial skills because of the growth of Taj Hotels. Indian Hotels Company Limited (IHCL), reported recently that profit after tax for the quarter ended March 2007 was nearly $30 million, with $20 million a year ago; it attributed the higher profits to higher room rates and strong occupancy. Revenues rose 45 percent to $127 million from $85 million a year ago.

The company's revenues in 2006 rose 40 percent to $575 million from $270 million in 2005, as the international expansion of the Taj in the US brought in higher room yields in cities such as San Francisco and New York. Its nearest competitor, The Oberoi Group, pulled down revenues of about $300 million.

Taj Hotels' stock price rose by 1.80 percent to close at $3.65 on the Bombay Stock Exchange while the exchange's benchmark index Sensex rose 1.53 percent. The company now manages a portfolio of 81 hotels with 9901 rooms. The Taj Hotels Group, including managed hotels, generated a group turnover of nearly $1 billion worldwide.

"The company has outperformed our expectations with its operating profit margins nearing 40 percent for the first time on the back of lower license fees. We expect the company to continue to perform well and have a buy on the stock with a target price of $4.25 over the next one year," Amol Rao, research analyst, Infinity.com Financial Securities Ltd, a Mumbai-based brokerage firm, told reporters recently.

Part of Taj Hotels' growth in revenues and profits can be attributed to the severe shortage of deluxe hotel rooms in India, particularly the large cities that have been attracting larger numbers of foreign businessmen because of the economic boom. According to hospitality consultants HVS International, revenue per available room for five-star deluxe hotels in India increased about 117 percent to nearly $1.8 billion in fiscal 2006 from fiscal 2002.

In addition, there's a boom in demand for budget hotels, which is why Ratan Tata has created the "Ginger-brand" budget hotels, and is building more four-star hotels. It expects to launch some 30 budget hotels by the end of next year.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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