Cigarette to hotels giant ITC revealed that its board has accepted the demerger of the hotels’ division, putting an end to months of whispers. For the 30 lakh stockholders of the multi-bagger stock, which has been the best-performing Nifty counter in recent months, the move is intended to unleash value. The Board approved the demerger of the hotel business under a scheme of arrangement, with the company holding an approximate 40% stake in the new entity and the remaining approximately 60% being held directly by the company’s shareholders proportionate to their shareholding in the company.
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Investors had beefed by ITC’s decision to retain a 40% ownership in the new subsidiary, to be known as ITC Hotels, and ITC shares dropped more than 4% to Rs 468 on BSE after the news. On August 14, the board will be asked to approve the demerger. In order to create the next growth horizon and improve value generation for all stakeholders, the directors of the board of directors today considered possible alternative hotel business formats.
In the fast-growing hospitality industry, the board noted that the company’s hotels business has matured over time and is well positioned to forge its own growth path as a separate entity with a sharper focus on the business and an ideal capital structure while continuing to leverage ITC’s institutional strengths, brand equity, and goodwill.
The proposed reorganisation would guarantee the company’s continued interest in the hospitality industry, offer long-term stability and strategic support to the new entity in its pursuit of accelerating growth and sustained value creation, and allow for the leveraging of cross synergies between the Company and the new entity.
According to ITC, the demerger will make it easier for the new organisation to find the right investors and strategic partners/collaborations whose investment strategies and risk profiles are more closely matched with the hospitality industry. Additionally, by giving the shareholders of the company a direct position in the new corporation and an unbiased, market-driven assessment of it, it will enable them to realise the full value of the hotel business. This action by the business also supports the more focused capital allocation plan put in place in recent years, which is evident in the shift to an “asset-right” strategy in the hotel industry, according to ITC.
The hotel industry’s proposed demerger is proof of the company’s commitment to long-term wealth generation for stakeholders. The creation of a company with a hospitality emphasis will usher in the next stage of growth and wealth creation by harnessing the enormous potential in the Indian hospitality sector. In the anticipated reorganisation for both ITC and the new entity, institutional synergies will continue to be advantageous.
The hotel industry contributed around 4% of ITC’s overall revenue and 2% of EBIT in FY23. With revenues of Rs 2,700 crore, 120 facilities, and 11,500 rooms in its portfolio, ITC is the second-largest hotel chain in India among companies with publicly issued stock. ITC adopted an “asset-right” strategy in recent years, emphasising the expansion of its portfolio of properties through management agreements rather than through the purchase of hotels. The autonomous firm has added about half of its new rooms over the past three years through management agreements. Revenue in the hotel industry increased at a 12% CAGR between FY20 and FY23. Healthy occupancy rates (70%) and peak average room rates (ARR) allowed the segmental EBITDA margin to increase to an all-time high of 32.2% in 2016.
The segment’s sales doubled over FY22 and were 1.4 times higher than pre-pandemic levels. The hotel industry, according to analysts, is in a good situation, with rising travel demand and no significant new room supply entering the market, leading to high occupancy and ARR. ITC Hotels’ enterprise value has been estimated by Jefferies to be Rs 18,300 crore based on an 18x EV/Ebitda multiple, which represents a 20% reduction from IHCL.
Stamp duty will have financial ramifications, but they will not likely be significant, according to ITC. Given that both the new and old corporations will be based in West Bengal, a stamp duty of 0.5% of the fair market value of the shares issued as consideration will need to be paid. This authorisation has been requested from the West Bengal NCLT (after requisite approvals). The management pointed out that there is a reduced rate (rates are capped) for mergers and acquisitions regarding assets in other states because such expenditures will not be significant.
ITC will levy a royalty on the use of its brands; however, it is unlikely that the rate will be significant. ITC strives to keep business efficiencies on an arm’s length basis.
ITC does not intend to enhance its interest in hotels by buying shares from those who are selling them. The management has made it clear that the shareholder’s decision about their ownership of the new organisation would be an autonomous one. ITC also does not intend to repurchase shares from current shareholders.
The demerger of hotels will probably aid in the expansion of the Company’s return profile. For FY23, management anticipates an increase in ROCE of 18–20 percentage points and an increase in ROIC of 10 percentage points. The age of the business, corporate strategy, industry dynamics, and own level of evolution will all play a role in the demerger of other parts. Although the management does not completely rule out these possibilities, careful consideration of the advantages and disadvantages of the choice is required.
ITC intends to pursue its 2017 asset rights strategy under the new organisation. The hotel segment has added 18 properties during the last 16 months under the management contract. The management believes that going forward, capex should only be used for depreciation.
The entity will, however, be willing to purchase any suitable marquee property if the necessity arises. The management believes the new organisation requires both a debt and an equity position to obtain funds because it will not have any debt or significant assets, according to Emkay Global.
Talent assistance is likely to continue ITC’s strategic support for the new organisation will reassure staff. The business will continue to use cross-segment learnings for its future employees, with the help of the relevant boards. Employee stock ownership plans (ESOPs) are available at ITC; when an employee transfers, the new employer sets the parameters of the plan. Benefits accrued will be equivalent to or better in the new company; they will not be less favourable than they are now.
Written by – Sneha Jain
Edited by – Khalid Khursheed