This may be a completely noob question (I’m still learning the push/pull of various factors on Stock price movement): Wasn’t the demerger being anticipated and asked for by investors for a long time? Then why the price correction? Can someone explain this market reaction based on a fundamental human behavior understanding?
Can You elaborate point 3. Not sure if its that way.
The price reaction was nothing but the average Institutional stock investing philosophy, that to buy on the rumour and sell on the news. Which they have to adhere to as they have to provide periodic returns to their investors. Apart from that there is some holding company discount notion and also there was a bullish run so a correction was overdue.
The folks saying why keep 40%, I would say what would have they done. Either find a buyer right now who was ready to pay the premium price or let the demerged entity be properly established and then at some point after BAT’s intention fructify take a call on Hotel subsidiary. I still see upside to this as ITC’s ratio will be hell lot better than ever.
On further contemplating, stock price reaction apart as that is something i am not very much concerned over short term, i feel the decision to hold 40% stake in demerged entity is a reasonable one putting ourself in management shoes. As someone rightly pointed out, they would otherwise risk to loose control over the business if and when BAT sells or someone keeps picking more stake with takeover interest.
The intention was always of a demerger and not sale… so IMO the structure of demerger is very reasonable as per that to protect all interest as per the original intention. I think short term investors are the ones who did not like as this may pause short term rally and/or momentum of the stock price.
Business vise and decision vise there is no surprise.
Disc: Second largest holding by market value and largest by cost hence biased & critical. Post only for academic purposes and I can be wring in all my assessments. Not a buy/sell recommendation. Not eligible for any advice.
The demerger ratio announced is not quite favorable to existing shareholders, since shareholders are not getting one share for each share they are holding, they are disappointed. Markets have been gung-ho about the demerger because the hotel business has been a drag on ITC’s books. The hotel division had been a capital guzzler, accounting for over 20% of ITC’s capex. However, it contributed less than 5% to ITC’s revenue and EBIT over the last decade.
The demerger will remove the overhang from investor concerns about hotels being a low return-on-equity business, allowing them the option to stay only with ITC’s high-return businesses.
Disc: No Buy or Sell recommendations…
My understanding is - When you spinoff the whole thing, you pay no taxes since the shareholders get the entire company. Now that ITC owns 40%, if in the future they want to reduce stake - they will have to pay taxes unless they spinoff this 40% to shareholders as well.
Is there information available on how much of the ITC Hotels real estate is owned by them?
How owns it in the future? ITC Hotels or ITC?
What’s the management/shared services agreement between the 2 entities?
As far as I know, even with a 40% holding in a controlled subsidiary, the accounts will need to be consolidated in parent books. This will negate any improvement in ROCE at consol levels. Please correct me if I am wrong here.
The real test will be how does the hotel co do its fund raising in future- will it be external lenders, borrowing from parent or more equity. With a 9% OPM, its returns will be lower than the cost of capital. Can ITC cut the umbilical cord and set the hotel co free?
The entire exercise of 60% spin off will make the hotel co accounts transparent. It will force them to be more capital efficient and stay away from grandiose projects. And hopefully ITC will not keep on funding them.
ITC may has plan at later stage to sell off its 40% holding and this will definitely positive for the 60% shareholders .
This kind of approach just revels the Management Mindset. And Market is more upset with mindset exibited.
It would depend upon “control” i.e. the management of Hotels business are independent then possible no consolidation would be required. Other non-financial support i.e. loan/LC/Land Lease etc if all not not material between the two companies they should be able to stand the test regards consolidation. My guess Hotel company would have to pay royalty on ITC brand and is the where the trick would be - ITC would like to keep control on ops to protect brand identity where control test may fail. The last word on this not out as yet and therefore the market does not like it.
Disc: Invested
Looks a very reasonable decision with this.
Itc wants to avoid hostile takeover of ITC Hotels. (British tobacco company owns 28 percent of ITC, if it was a complete demerger, it could have sold it’s stake and someone can attempt hostile takeover.
And this confirms why delisting can’t work for it!! Even if it demerges it’s FMCG business, that wouldn’t be complete demerge either!! And behold, holding discount comes to party after that.
BAT results came today
:https://www.bat.com/group/sites/UK__CRHJSY.nsf/vwPagesWebLive/DOCU2KHU/$file/HY_2023_Announcement.pdf
The 40-60 ratio shows the mindset of management here which in my opinion is a reasonable one. Complete demerger would invite takeover attempts and all the work done by ITC over the years would get wasted and someone else would reap all the benefits of a mature and profitable hotel business.
Two things I am interested here is the amount of royalty ITC gets from hotels and the freedom new management gets in running the business. Same management continuation would negate the entire point of demerger.
Also, BAT selling it’s stake in hotels should be a win-win for all as they will get rid of non-core business (for BAT) and hotels management won’t have to worry about keeping the biggest shareholder BAT happy while making decision for hotels. BAT will have an indirect stake but much less than before.
Disclaimer - My first stock purchase, so emotionally biased here
The management has now clarified that ITC hotels will be an associate company and as such only the value of the investment will have to be accounted in the books. It would seem that the new entity will not be controlled by ITC and will be structured as such. So, ROCE for ITC will improve once the capital employed comes down from demerger.
Analysts had not ruled out the possibility of ITC buying BAT’s stake in hotels to take its ownership above 51% mark but now the management has clarified in an analyst call that as of now, the plan is to maintain a stake around the 40% range and that there are no plans to buy additional stake from other investors.
ITC will also earn royalty from the new subsidiary to use the ‘ITC’ brand based on industry benchmarks.
After the demerger, ITC Hotels, which will have a strong debt-free balance sheet, will be accounted as an associate company. ITC said its RoCE shall improve by 18–20% and RoIC by 10%.
The management said ITC Hotels will continue to follow the ‘asset-right’ strategy, adding new hotel properties mainly through management contracts. “The business has added 18 new properties in the last 16 months and has a strong pipeline across all brands. It may, however, consider newly-owned hotels if there is a strategic rationale,” Jefferies analysts noted after talking to the management.
As per current projections, internal accruals should be sufficient to fund the envisaged growth plans of the hotels business but it will have the option to raise external capital.
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I did a quick search and looks like most investments of BAT are in tobacco companies and new investments are focussing on nicotine vaping and heated tobacco. So likely BAT would exit hotel business. Maybe an opportunity to buy ITC Hotels if there is severe reaction on listing day.
disc - invested in ITC from long time.
ITC already has a demerged entity listed on the bourses. ‘International Travel House’.
It is also listed as an associate company of ITC and the results are included on a consolidated level. ITC holds 61.69% in the company post listing. It is number 2 on the list of associate companies.
https://www.bseindia.com/xml-data/corpfiling/AttachHis/b07e7878-f869-4ba0-ae3f-67151ecb1786.pdf
We can expect a similar structure with ITC hotels and ITC Infotech in the future where ITC will just be a holding company that keeps on churning out new businesses. What will ITC do if it starts divesting completely from every business it demerges?
I had been reading all the comments posted by senior board members & so much to learn from this.
In addition I would like to bring another perspective in this discussion.
In the whole discussion above mostly we have forgotten what is in it for investors who will hold ITC Hotels share. Here are my three thoughts :
- It will be 2nd largest listed hotel entity in terms of market cap. I guess with around 18000 Cr MCAP. Displacing EIH (Oberoi hotels). Screenshot from screener is below :
Interestingly as per my limited knowledge ITC hotels would not have any debt on the books. As they are doing asset light mix for last 3 years, opening more & more hotels.
The current PE of other listed hotels chains are above 30 in top 5, if ITC hotels need to command that PE as well, would it rise is a question need to be answered.
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BAT, it would hold, I guess around 18-20% in ITC hotels. Now if it sells in open market it would bring the price down & it would be not a win win situation for BAT either, my best guess is, it would find a strategic investor for this. How about LIC (just thinking aloud). Any strategic investor would be interesting here, if they want to become promoter they can easily bring open offer by acquiring some more stake from open market. Would ITC hotels would want to increase the stake directly buying from BAT in this case. This is an open question to me.
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ITC, a lot of ESG norms which ITC boast of comes from Hotels divisions. All their hotels are LEED® Platinum Certified. This is mentioned in their website too : Sustainability
This video shows the kind of work ITC Hotels has done & found it really interesting, taking sustainability to next level:
Most of the competition in similar category at most offers, Glass water bottles in rooms.
ITC would love to have these benefits coming to them as well, which they can keep boasting off on their website.
Looking forward to hear from senior members on this.
Disc : Invested with no transaction in last 30 days.