Posted by: John Elliott | September 27, 2010

Reliance and Oberoi – an unlikely duo for India’s best hotels

Is Mukesh Ambani, one of India’s top entrepreneurial businessmen, reaching a new level of acceptance and respectability that will gradually subsume the more negative aspects of his family’s Reliance group history?

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The question stems from two recent events. The most important is Mr Ambani (left) being picked as a cash-rich and apparently benevolent financial partner by P.R.S. ‘Biki’ Oberoi (below). At the age of 81, Mr Oberoi controls and personally runs India’s best hotel group of the same name with the vision and energy of someone half his age, but he needs outside support to keep up the momentum and plan for the future.

“He will be a strategic investor,” Mr Oberoi told me over the weekend when I asked him about Mr Ambani’s role following the Oberoi family’s recent sale to Reliance Industries’ (RIL) of a 14.2% stake in East India Hotels (EIH), the Oberoi parent company.

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“He has financial strength and contacts and can help us in many ways, especially with our international expansion. I’ll be meeting him soon to discuss this”.
 
The second event is the publication last week of Ambani & Sons*, by foreign correspondent Hamish McDonald, that traces the group’s history from its founding by Mukesh’s late father, Dhirubhai. The significance is that when Mr McDonald’s first book on the family, The Polyester Prince, was published in 1998, the family forced cancellation of the Indian edition. The new book includes 16 marginally sanitised chapters from 1998 plus more recent history, yet Mukesh and his younger (and estranged) brother Anil are turning a blind eye. This seems to indicate that they feel they have grown to such a level of acceptability that they do not need to try to bury and silence uncomfortable history.

The Oberoi Mumbai

Mr Oberoi has for many years been looking for a way to secure the future of his hotel group. His son Vikram and nephew Arjun are both top executives and board members, but are not seen as long-term successors. He therefore needs to plan for future control, management and family wealth – a problem faced generationally by all family-controlled businesses.

Mr Oberoi also has a more immediate ambition to find funds that will enable him to expand the Oberoi brand abroad. He told me that he would like to start hotels in London, Paris, New York, Shanghai and Singapore – home cities for the group’s India guests. Currently there are only six Oberoi hotels abroad – in Egypt, Saudi Arabia, Mauritius and Indonesia.

Mr Ambani can meet that need because Reliance is cash rich, generating more than $5bn funds a year. His current Rs1,000 crore ($220m) investment in EIH is, as one analyst put it to me, “just 15 days of cash”. So he could easily afford to a few more days’ cash to help set up some hotels.

The bigger question is whether this means that, sometime in the future, Oberoi hotels will be controlled and run by Mr Ambani. The answer, though no-one is saying it now, seems to be ‘yes’. It does look as though Mr Oberoi has chosen Mr Ambani not only to support him and let him run the hotels himself for the foreseeable future, but also as the businessman most likely to sustain and build the brand in the longer term.

Mr Ambani would not be making this investment simply as a white knight, though Mr Oberoi did need one to ward off unwelcome advances from the ITC, the Indian cigarettes-to-hotels group that owns 14.98% in EIH and might have had its eye on some of the family stakes.

Oberoi Udaivilas in Udaipur

He wants to get into the Indian services and consumerism sector, where RIL has no in-house professional expertise and no significant stakes apart from retail shops and stores. Buying into a top well-managed brand like Oberoi is exactly what RIL needs – and being chosen by Mr Oberoi enormously boosts the Ambani image.

Till now Mukesh Ambani he and younger brother Anil (who runs a separate group, Reliance-ADAG) have not been seen as wise choices for companies seeking joint ventures and investment partners in India. There was surprise two years ago when Marks & Spencer agreed a joint venture for stores, even though it secured nominal control with a 51% stake.

Mr Ambani will now have to be on his best behaviour because the business world will be watching. He is most unlikely to throw his weight around. RIL and EIH will probably each buy their full allocations of a planned $288m rights issue, leaving RIL with almost 15% and EIH with 32% (or slightly more if it mops up some surplus).

A report in the Business Standard that two EIH companies are to be formed, one controlled by RIL for the Oberoi assets, and the other running the hotels and controlled by Mr Oberoi, looks highly improbable, given RIL’s minority stake. “Absolute speculation,” Mr Oberoi told me, adding “We have never thought of it” when I pointed out that saying “absolute speculation” to a journalist usually means “yes”.

There have been reports that Nita Ambani, Mukesh’s wife, might join the EIH board at some stage. It would be logical for Mr Oberoi to invite someone from Reliance, now it has a strategic stake, and she would be the logical choice. Whether she’d be made vice chairman, which the Business Standard also suggested, is I sense probably a long way off.

All this is the story as the two sides would I guess, from their different vantage points, like it to be seen. [added October 8:  ITC it seems might have different ideas. It says it is keeping its stake. Gossip in Kolkata, where ITC is headquartered, suggests the company might be hoping for an eventual bidding war against Reliance]

Mr Oberoi gets what he needs in terms of control, management, and wealth because he stays in control and will continue managing the business, but now has a partner who could move into control much later and provide for family wealth by buying any available stakes, thus warding off predators.

Mr Ambani gets a fabulous brand and potentially added respectability, as well as the fun of opening up another competitive front with the Tata group that controls the bigger but less suave Taj hotel group.

Such partnerships do not however always lead to harmony. Both Mr Oberoi and Mr Ambani are famous for the single-minded personal determination with which they run their highly successful but very different businesses. It may be a marriage made in heaven, but whether it is or not, it will certainly be worth watching.

*My review of Ambani & Sons is on a later post – http://wp.me/pieST-14M

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Responses

  1. [...] In retail, companies like Marks and Spencer’s have tie-ups for specialist stores, and there is also a new and surprising investment in India’s Oberoi hotel group. [...]


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