India's EIH announces $258 million rights issue

Luxury hotel operator EIH, the flagship of India’s Oberoi Group, has announced a rights issue with the aim of raising up to Rs11.79 billion ($258 million). The Reg-S offering, which is priced at a 20.5% discount to the theoretical ex-rights price (Terp), will kick off on March 1.

Rights issues are not that common in India and the latest issue to hit the market was the $263 million offering by integrated rice producer and processing company Rei Agro in July last year. In an Asian context, the EIH deal will also be unusual in that it isn’t underwritten. This means that there is no guarantee that the company will be able to raise the money in full.

However, the promoters – primarily the Oberoi Group – have said they will take up their 32.3% entitlement in full and, according to a source, Vikas Oberoi, the Indian billionaire who founded the group, has indicated that he will buy a portion of any unsubscribed rights shares, although he hasn’t specified how much. Two other large shareholders, ITC with about 15% and Reliance Industries with 14.8%, have supposedly also expressed support for the rights issue, but have not publicly said they will take up their shares in full.

Large shareholders typically don’t like to get diluted, however, and often choose to participate in new share offerings to prevent that from happening or to limit the impact. And Reliance Industries became a large shareholder as recently as August last year when it bought a 14.2% stake in EIH from the promoter group.

Citi is the sole bookrunner for the offering.

EIH, which 15 years ago was known as East India Hotels, is offering five new shares for every 11 existing shares, which means it will need to issue approximately 178.6 million new shares if the offering is fully subscribed. The new shares account for 45.4% of the existing share capital. The price has been set at Rs66 per share, which equals a 27.6% discount to the closing price of Rs91.15 last Thursday (before the issue was approved) and a fairly tight 20.5% discount to Terp, which comes out at Rs82.98 when based on the same closing price.

When the deal was first announced last Friday, the company said the price of the offer would be Rs65 per share, but in a stock exchange filing yesterday, EIH said that was a mistake and the actual price should be Rs66 per share. The new price narrowed the discount to Terp from the initial 21.7% -- a fairly insignificant change to a discount that was already quite tight. A source argued that the 30%-35% discounts to Terp that were common in 2009 and early last year, as deteriorating risk appetite forced Asian companies to turn to existing shareholders for capital, are no longer necessary and 20%-30% should be sufficient to get the deals done. 

And while still at the tight end of that range, EIH’s share price gained 2.7% last Friday and another 8.3% on Monday this week, which meant the discount versus the close immediately widened to 34.9%. And the share price has continued to edge higher in the past couple of days, closing at Rs103.95 yesterday.

The rights issue comes after EIH’s share price has been on a declining trend, falling almost 40% from a high of Rs150.90 at the end of August to the low last Thursday. This would make the controlling shareholders less willing to do a follow-on share sale to new investors as it would mean the dilution would come at a low price. But the company does need money, making a rights issue a good choice. EIH said it will use the money raised partly to repay or pre-pay debt, and partly to fund the construction of a flight kitchen at the Indira Gandhi International Airport in New Delhi.

Aside from operating luxury five-star hotels under the Oberoi brand and slightly cheaper hotels under the Trident brand, the company is also involved in other businesses such as flight services, car rentals, air charter services and printing.

The rights issue will be open for subscription between March 1 and 15. The record date to determine who will be eligible to participate has been set for February 22, although the source said shareholders who do not wish to buy the new shares can sell the rights in the market.