Proposal for Acquisition of Oberoi Group by Reliance Industries Ltd

Proposal for Acquisition of Oberoi Group by Reliance industries Ltd

Submitted To- Submitted By-

Ms. Ridhi Bhatia Harneet Singh Karan Arora Nitin Bansal Vineet Gupta Yash Jain

Proposal for Acquisition of Oberoi Hotels by Reliance Industries Ltd

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ACKNOWLEDGEMENT

We are extremely thankful to our teachers Ms. Ridhi

Bhatia for giving us the opportunity to undertake this project for

making a “Acquisition plan for Reliance industries ltd to

acquire Oberoi hotels ltd” and for their overall support,

valuable guidance, astute judgment, constructive criticism and an

eye for perfection without which this project would not have been

in its present shape.


Table of ContentsS.No Head Page No

1 Overview of Reliance Industries ltd 4

2 Reliance and Its interventions in service sector 5

3 Reliance : Swot Analysis 6-8

4 Industry attractiveness: Hotel Industry 9-11

5 Environmental Analysis – Pest Analysis 12-15

6 External Environment: Current Competition through Porter 5 Forces Model

16-19

7 Overview of Oberoi Hotels 19

8 Internal Analysis through Value chain analysis 19-23

9 Current situation of Oberoi hotels through SWOT Analysis

23-25

10 Valuation model for Oberoi Hotels 26-28

11 Mode of Payments 28

12 Post Merger Financial Ratios 29

13 Post Merger Issues 30

14 Post Merger Solutions 31

15 Post Merger Benefits 32


Overview of Reliance Industries

The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 44 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India.

Backward vertical integration has been the cornerstone of the evolu-tion and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum re-fining and oil and gas exploration and production - to be fully inte-grated along the materials and energy value chain.

The Group's activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre in-termediates, plastics and chemicals), textiles, retail and special eco-nomic zones.

Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products.

Major Group Companies are Reliance Industries Limited (including main subsidiary Reliance Retail Limited) and Reliance Industrial Infrastruc-ture Limited


http://www.riil.in/

http://www.riil.in/

http://www.ril.com/

Reliance and its service sector interventions:

In 2010, Reliance buys 14.12 % stake of Oberoi’ Hotels• ITC Ltd had increased its stake to 14.98 per cent in EIH.• Speculations were there that ITC could go for an open offer once

it crossed the 15 per cent mark.• EIH Chairman PRS Oberoi' wanted strong associations for

defeating ITC's possible hostile takeover.• Reliance Industries Ltd paid Rs10.2bn ($217m) for the 14.12 per

cent stake in EIH

Reliance move towards Service Sector:• Indian Economy is becoming more of a Service oriented economy:

56% of the total is contributed by the service sector in entire GDP.

• Government is promoting tourism through Incredible India• Hospitality industry set to grow at 15 % for next 5-8 years• Availability of huge reserves for investment in service sector• Emotional quotient of Indian people for Reliance would help

Reliance gain market confidence and consumers would have faith in Reliance services.

• Reliance is close to signing an agreement with DE Shaw & Co. to start an $800 million infrastructure fund

• Recent establishments in pharma and retail sector, $1.2 billion in a broadband.

• Plans to make Investments in Hospitals, farmhouses and universities, sports marketing in future.

• This would be another business for Ms Nita Ambani, • Like cricket team, the Mumbai Indians, as well as its school and

healthcare initiatives.


SWOT OF RELIANCE INDUSTRIES LIMITED

Strengths Technological Skills - Reliance has a very good technological team.

Since it is in a manufacturing process their cost of manufacturing should not be so high that is possible because of the good technology they have.

Distribution channels - I n the manufacturing sector distribution channel is one of the important factor. Without having a good distribu-tion channel it is very difficult to sustain in the manufacturing industry.

Production Quality - The final output comes out from the complete process is very good. This is possible because of the good technologi-cal skills they have. So their strengths are inter-related in terms of sup-porting each other.


Strength Weakness

OpportunitiesThreats

Presence in many sectors - Their strength is that its presence as a group is in many sector. So if there is any loss in one particular sector then it may undue that loss with any other sector.

High resource & surplus - In India in terms of market capitalization it is the largest industry. They have a huge resource and surplus kept aside which needs to be used in other areas where they can get some return out of it.

Strong financial performance- They have a very strong financial performance in terms of profit as well as net worth. Their profits were increased from year and year which becomes one of the reasons of in-crease in share price.

Fortune 500 companies - It is included in the Fortune 500 company which itself is a global acknowledgment for any company. Because of its presence in Fortune 500 the reliability in the company increases be-cause of which investment comes from the public in large. They have a huge Brand equity in the country where they have been able to form an emotional quotient with people.

Weakness

No Direct Contact with the consumers- Their one of the biggest weakness is that they don’t have direct contact with the customer be-cause they are in the manufacturing sector. Though peoples have an emotional quotient with RIL but to increase that they have to do more like going into the ventures where people can connect with RIL.

Un-utilized high resource & surplus. Since they have a huge re-source and surplus but they were not being utilized properly. So if the resources and surplus can be utilized then the company can generate extra income from it.

Over reliant on manufacturing sector- They are over reliant on manufacturing sector which can cause problem for the company be-


cause if in case manufacturing sector will face any recession time then the company as a whole will have to suffer, so to overcome that they have to diversify themselves.

Opportunities- Low per capita consumption- Currently, domestic per capita poly-

mer consumption is nearly 4 kgs while the global average is nearly 20 kgs. This underlines the fact that there is immense scope of capacity expansion in the country as the market to be tapped is huge.

Spending on R&D- Spending on R&D activities is around 2% of sales as compared to an international average of 18%. This leaves enough room for product development. Also, currently, India has a chemicals trade deficit of about US$ 1.5 bn a year, which leaves enough invest-ment opportunities in the industry.

Growing Opportunities in Service Sector: Service sector con - tributes 56% of GDP, and reports growth rate of approx 15-18 %,

Threats- Customs duties- Historically, the domestic industry has been pro-

tected from overseas competition by high import duties imposed by the government. However, of late, Import duty on polymers has been steadily reduced and is currently at 20%.As part of its commitment to various multilateral and bilateral trade agreements, the government is likely to reduce duties going forward and this is likely to reduce the cushion enjoyed by the domestic players as against the landed cost of imported products.

Growing competition- The domestic industry is likely to witness im-mense competition going forward with IOC Further. If there are any huge changes in the petrochemical sector then reliance may have to suffer huge losses because there contribution of profit from petroleum products is huge.

Manufacturing sector grows at 7-8 % every year as compared to ser-vice industry which reports 15-18 % every year, so there over reliance on manufacturing sector may back fire.


Only major intervention in service sector is retail, which itself is faced by the threat of 100 % FDI, which could open the gates for players like Wal-Mart.

INDIAN HOTEL INDUSTRY:

India's hotel industry is experiencing a boom, which is determined by increasing numbers of business and tourist arrivals in India after RECESSION.

The hospitality industry is one of the fastest growing industries today with more and more people travelling for business as well as vacation.

So keeping this in mind India, today, offers hotel facilities at par with world standards and has the capability to provide all the hotel infrastructural needs of the inbound tourist as well the business visitor.

Indian tourism and hospitality sector is recovering again from its bad times of business slowdown. Travellers are taking new interests in our country which leads to the improvement of the hospitality sector.

Foreigners are visiting India at a frequent rate and have reached a record of 3.92 million; this is leading to a boost up in hospitality sector.

Hospitality Industry is closely linked with travel and tourism industries because the more tourists visit our country the more business hotels could receive from them which lead to increase in occupancy level of rooms in hotels.

Overall Industry Attractiveness

Environmental Analysis:

INDUSTRY ATTRCTIVENESS

Strength


Natural and cultural diversity: - India has cultural heritage. It is ranked the 14th best tourist destination for its natural resources and 24th for its cultural resources, with many World heritage sites, both natural and cultural, rich fauna, and strong creative industry in the country.

Demand-Supply gap: - Indian hotel industry is a facing a mismatch between the demand and supply of rooms leading to higher room rates and occupancy levels. With the privilege of hosting commonwealth Games 2010 there is more demand of rooms in five star hotels. This has led to the rapid growth of the sector.

Government support: - the Government has realized the importance of tourism and has proposed a budget of Rs, 540 crore the development of the industry. The priority is being given to the development of the infrastructure and of new tourist destination and circuits. The Department of Tourism (DOT) has already started the “Incredible India” and “Athithi Devo Bhava” campaign for the promotion of tourism in India. The ministry promoted India as a safe tourist destination and has undertaken various measures, such as stepping up vigilance in key cities and at historically important tourist sites. It has also deployed increased manpower and resources for improving security checks at key airports and railway stations.

Increase in the market share: - India's share in international tourism and hospitality market is expected to increase over the long-term. New budget and star hotels are being established. Moreover, foreign hospitality players are heading towards Indian markets.

Weakness:-

Poor support infrastructure: Though the government is taking necessary steps, many more things need to be done to improve the infrastructure. In 2003, the total expenditure made in this regard was US $150 billion in china compared to US$ 21 billion in India. Lack of support from the law and order for providing security to the tourist and tourist places

Slow implementation: - The lack of adequate recognition for the tourism industry has been hampering its growth prospects. Whatever steps are being taken by the government are implemented at a slower pace.


OPPORTUNITIES:-

Rising income: - Owing to the rise in income levels, Indians have spare money to spend, which is expected to enhance leisure tourism

Open sky benefits: - With the open sky policy, the tourism industry has seen as increase in business. Increased airline activity has stimulated demand and has helped improve the infrastructure. It has benefited both international and domestic travels.

Destination for tourism: - Hotels in India has a shortage of 150,000 rooms fuelling hotel room rates across India. With tremendous pull of opportunity, India is a destination for hotels chains looking for growth. The World Travel and Tourism Council, India, data says India ranks 18th in business travel and will be among top 5 in the next decade. Sources estimate, demand is going to exceed supply by at least 100% over the next 2 years. Indian hotel room’s rates are most likely to rise 25% annually and occupancy to rise by 80%, over the next two years. ‘Hotel Industry in India’ is eroding its competiveness as a cost effective destination.

Threats

Fluctuation in international tourist arrivals: - The Total dependency on foreign tourists can be risky, as there are wide fluctuations in international tourism. Domestic tourism needs to be given equal importance and measures should be taken to promote it.

Increasing competition: - Several international majors like the Fore Season, Shangri-La and Aman Resorts are entering the Indian markets. Two other groups- the Carlson Group and the Marriott chain are also looking forward to join this race. This will increase the competition for the existing Indian hotel majors.

Overall if we look at the Industry attractiveness , Hotel Industry is one of the fastest growing sector in the Indian Economy and entering this industry although requires huge investments but the return and growth from business still makes this industry as an


attractive sector.

PEST Analysis for hotel industry

Since hotel industry is attractive enough but for entering in this sector, Analysis of the Environment has to be done from the point of view of all the macroeconomic factors.

POLITICAL FACTORS

Environment Laws:

An analysis of the hotel industry has revealed that there are environmental, labour, and food & safety regulations as well as regulations for merging, which must be looked at before entering into the industry. Environment is one aspect the government will always have their eye on, and they will introduce laws that will protect the environment. Such laws will need to be looked at as a player in the hotel industry. Hotels are liable for clean up of contamination and other corrective action under various laws, ordinances and regulations relating to environmental matters. Such laws referring to keeping the environment in good shape can be quite costly to hotels in the industry.

Employment Legislations:

Another political factor that can impose a concern for a member in the hotel industry is the laws regarding labour. For instance, there are laws that govern minimum wage. Although this might not seem to be a concern, but anytime you are forced to pay a wage not in plans, which are taking away bottom line. Another law that can be quite costly is treatment of employees. For example, there are laws that prevent discrimination, and sexual harassment.


If a hotel company violates these laws, it can lead to severe lawsuits, and at the same time the hotel will be slicing their revenues. The labour laws are pretty strait forward, but must be obeyed in order to keep on going profits.

Level of Terrorism

Level of terrorism affects the number of tourists that are attracted towards the country.There was a steep fall in the tourism percentage received in the country after the Mumbai Attack

Economic factors

The Government’s major policy initiatives include:• Liberalization in aviation sector• Rationalization in tax rates in the hospitality sector• Tourist friendly visa regime• Immigration services• Procedural changes in making available land for construction of hotels• Allowing setting up of Guest HousesAll these provisions make the setting up hotels in Delhi a favourable place for setting up a hotel.

Foreign Trade PolicyThe Foreign Trade Policy announced in April, 2006, offered following incentives to the hospitality industry:Hotels and Restaurants are allowed to import duty free equipment and other items including liquor, against their foreign exchange earnings under the Served from India Scheme. As in previous years, this entitlement is 5per cent of previous year’s foreign exchange earnings for hotels of one-star and above (including managed hotels and heritage hotels) approved by the Department of Tourism and other service providers in the tourism sector registered with it.

FDI in Hotel and Tourism Sector100 per cent FDI is permissible in the sector on the automatic route. The term


Hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organization.

Social Cultural Factors

Hospitality industry has the socio-cultural impact. This means that social structures, the culture and traditions can be influenced, changed or even completely substituted due to hospitality industry. Social cultural factors are a big issue to look into for hotel industry because it deals with a lot of consumers who have different demographic, ethnic, cultural backgrounds. By satisfying each consumers or generalizing the way to hospitalize, hotel industry can have chance to expand more.

DemographicsIndia as a country is continuously growing, and its trade with foreign countries is increasing, Indian Urban sector .People‘s eating out habits are changing. So now the People‘s attitude towards the Five star hotels has changed. Public’s attitude has changed from wastage or excessive Spending to Luxury and as a matter of pride.

Technological factors

Use of Hi-Tech Soft wares

In order for a hotel to prevent obsolescence and remain technologically advanced, the hotel must be up to date with all the latest technological changes that are taking place that might have an impact on the industry. Today, the Internet is increasingly being used. For the hotel industry, Consumers need to take this into consideration. So, in order for a hotel to have a competitive advantage, they need to have a very high tech information system.


In the hospitality industry, as in all arenas of commerce, technology represents one of the strongest forces for change, while having had a significant impact on brand marketing. Hotel reservations systems have been shifting from voice to electronic Global Distribution Systems are now on the verge of consumer access via the Internet.

The increasing role played by the Internet should slowly affect booking patterns in the future as inexpensive consumer access to hotel product becomes available. This, of course, has potential implications for the benefits associated with the branding of hospitality products.

Online Reservation system

Similarly hotel room booking and various other travel-tourism related services could be booked by a customer on-line at the best available rate. Advance IT software and systems make it possible for many agents and operators to provide a bouquet of complete services- i.e. from Airline ticket booking, airport pick and drop to Hotel room booking along with sightseeing at very nominal rates due to consolidation and integration of all travel and tourism related services using various software’s and booking engines interface. Due to this integration, booking engines are empowered to great deals to customers online.

Conclusion from Environmental Analysis (Macroeconomic events):

So overall the Pest analysis shows there is as such no big major force that stops the start up or running of a five star Hotel.

Now after analysis of environment factors, Oberoi has discovered over the years, the next important factor that affects is the Competition and problems that it could face in serving Customers .But on analysis it was identified that these forces of suppliers and competitors over the period have varied from destination to destination. Like in one place Taj could be the biggest competition, in other it could be ITC.

Also threat of new entrant is more than the other, so porter analysis for the hotel chain is done individually for each and every hotel. Broad areas remain the same but some sub heads are varied as per the location of the Hotel.


Porter 5 forces For ITC Welcome Group

2.5

1.7

1.1

0.600000000000001 0.5

Market Share(Approx)

Taj HotelsOberoi HotelsITC WelcomgroupHotel LeelaOthers


Current Competitors: High

Oberoi’s Group is basically a Business Hotel group so its biggest competitor is ITCLtd

With its Presence close to the Taj Hotel, makes it other competitor for Oberoi even though it is a Luxury i.e. a Leisure Hotel.

These two players are very big players in the Indian Hotel industry, so a small mistake from Oberoi could cause huge business losses.

Like wise in Delhi, apart from these big chains: other big players are Hyatt Regency, Le Meridian, Radisson and Ashok Hotel.

Threat of the new entrants: Moderate

Hotel Industry requires huge sum of initial investment, so threat of a new player to enter the Hotel Business in India is very difficult.


Threat from Foreign Hotel chains: These chains have started to come to the Indian Market, Like the Hilton's have come to Delhi, and Hiltons enjoys a very good reputation among the Foreign Travellers. It is highly likely that when Foreigners on visit to India, they would prefer a Known Brand over the Indian Hotel.

So Overall Threat of new Entrants is Medium to Moderately High.

Bargaining power of the Customers: High

Customers are of utmost importance in the hotel industry, every policy is framed keeping on mind the customers needs, desires and preferences.

Customers of Oberoi is basically the Business Travellers , Foreign travellers, Delegates and sports persons, HNI's and all the Head of states, CEO's , MD's of Big Companies.etc

These Customers are very choosy and very sensitive in brand choice and Services that are offered to them.

A small mistake from the Hotel staff can make them angry, and they switches over to the other Brand i.e. the other Hotel.

So as Customers are of very High Profile, so they have in general a very High Bargaining Power.

Bargaining Power of the Suppliers: LowOberoi purchases are: FMCG and Consumer durablesFruits and Vegetables ,all the requirements of Food and Beverages Departments , Regular requirements of the Housekeeping Departments, room requirements in the form of blankets , mattresses, and many more.

Most of these Purchases are done as an Institutional Buyers, so most often suppliers go to any extent and provide with various discounts and Low prices and schemes to win a client like EIH Group who has a well off financial position in the market.

If one of the Suppliers fails to provide the inventory in time they usually keeps a backup by having 2-3 supplies for the same goods. So they can


easily switch over to the other supplier very easily.

So Bargaining power of the Suppliers is Low.

Threat of the Substitutes: Low

The type of its Customers and their high Profile would not allow them to shift to any Leisure Hotel or to any resorts or to any of the Budget Hotel.

The Customers who stays at the five stars would not like to shift over to any other Hotel which doesn't provide the kind of ambience they enjoy in the Hotel like Taj and Oberoi.

Threat of the Substitutes is very Low.

The above porter analysis of Oberoi group shows two major areas where it needs to concentrate on is to do better than the competitors and still keeping the customers happy.

In order to do that Oberoi should have a Competitive edge over its competitors in terms of providing better service to its customers. In order to achieve that its value chain should be built on the parameters that can outplay its competitors and provide the best facility to its employees and customers.

From the above, it is visible After Taj and ITC WelcomGroup, Oberoi’s is the largest Hotel chain in India, which makes it a lucrative offer for Acquisition.

Overview of Oberoi Group

The Oberoi Group, founded in 1934, operates 28 hotels and three cruisers in five countries under the luxury ‘Oberoi’ and five-star ‘Trident’ brands. The Group is also engaged in flight catering, airport restaurants, travel and tour services, car rentals, project management and corporate air charters.

Oberoi Hotels & Resorts is synonymous the world over with providing the right blend of service, luxury and quiet efficiency. Internationally acclaimed for all-round excellence and unparalleled levels of service, Oberoi hotels and resorts have received innumerable awards and accolades. A distinctive fea-


ture of The Group’s hotels is their highly motivated and well trained staff that provides exceptionally attentive, personalized and warm service. The Group’s new luxury hotels have established a reputation for redefining the paradigm of luxury and excellence in service amongst leisure hotels around the world. The Oberoi Group is committed to employing the best environ-mental and ecological practices in technology, equipment and operational processes. The Group also supports philanthropic activities that range from education to assistance for the mentally and physically challenged. The Group is also a keen contributor to the conservation of nature and of cultural heritage.

EIH Ltd posted revenue of Rs. 907.27 crore for FY09-10 wit a PAT of Rs.57.23 crore. EIH is planning to invest Rs.150 crore over the next two years on new projects. It is looking at locations like London, Paris, New York, Shanghai, Bei-jing and Bangkok, mostly for management control of existing and upcoming

properties.

Internal Analysis of OBEROI’S Welcome Group:

Value chain Analysis at OBEROI’S Welcome Group:• Carried out to find or take stock of:

– OBEROI’S’s resources - assets, intellectual property, and people– What OBEROI’S can do best – its competitive strength

This analysis will help us discover that OBEROI’S can gain advantage in which areas and improve on others so as to gain the Competitive advantage in the market.

Analysis would also help us in gaining the insight of OBEROI’S group and can help in achievement of the Strategic fit with corporate strategies built at OBEROI’S.

Value Chain Analysis: Understanding Client’s Business


Firm Infrastructure

Human Resource Management

Technological Development

Procurement

InboundLogistics

Operations Outbound Logistics

Marketing& Sales

Service

SupportActivities

Primary

Activities

Relationship with Suppliers Relationship with Buyers

Support Activities

Infrastructure

This activity includes and is driven by corporate or strategic planning. It includes the Management Information System (MIS) and other mechanisms for planning and control such as the accounting department, Housekeeping trolley, Maintenance of hotel, furniture and other ambience. OBEROI’S over the years have maintained world class infrastructure that has always offered Contemporary Facilities to provide the unrivalled Luxury experience.

Technology Development

Technology is an important source of competitive advantage. Companies need to innovate to reduce costs and to protect and sustain competitive advantage. OBEROI’S used Opera softwares. Central Lock in System (CLS) & Central Registration System (CRS) for customers, Point of Sale (POS) for inventory control & store, Customer Relationship Management (CRM) and GFS guest feedback system that helps OBEROI’S in doing its work more efficiently than it would have been able to do without them. It helps them in making Databases of Customers that helps them in providing better services to their customers.


Human Resource Management (HRM)

Employees are an expensive and vital resource. OBEROI’S gives training to their all employees irrespective of their designation and work span through Welcome Management Institute, On-Job-Training., workshops, guest Lectures, job rotation.

People in hospitality industry plays a huge role in providing services to their customers, Attrition rate at OBEROI’S is lowest among its competitors and according to the last report employees were highly satisfied with the job.

Procurement

This function is responsible for all purchasing of goods, services and materials. The aim is to secure the lowest possible price for purchases of the highest possible quality.

OBEROI’S believes in doing most of its work on its own as a little mistake at ant step can affect the satisfaction of the Guests.

Apart from the Security Department everything is managed by OBEROI’S’s own teams.

Security is managed by an outsourced agency as it is a specialized function and is always done by specialized agencies.

Primary Activities

Inbound Logistics.

Here goods are received from OBEROI’S suppliers. They are stored until they are needed on the production/consumption department. Goods are moved around the Hotel.

They have their permanent supplier who supply on the request of Store Department Manager within 24hrs. Fresh fruits and vegetables are received and prepared every day.

OBEROI’S has always used a software POS that takes care of the stock of stores and updates the Purchase department about the store requirement.

It purchases its each requirement from more than one supplier so as to keep


the inflow of stores running even in the case of Default from any one supplier.

This policy also helps them in maintaining stiff competition between the competitors and helps it getting the most discounted prices.

Operations

Individual operations could include making of dishes, room service, cleaning & decoration of rooms, placing soap, tissue in a hotel, and wake up calls to customer, producing cash memos, security checks at various places, cleaning of pool & lawn, advance reservation through CLS & CRS.

Process begins with Guest making a call or walking in to the Hotel.

Operation includes bringing the guest from the airport, making the arrangements in the room as per the specifications, check in arrangements, providing room service for food, wake up call, managing Health club, spas, swimming pools, Business Centre etc, making proper arrangements for the checking out of the guests.

All these processes involve many moments of truth and providing excellent service at every step includes well defined operational steps that include pre written dialogue points, discovering Fail and problem points. OBEROI’S has realized the importance of people in the process so it holds regular Area effective teams, regular feedback sessions and is currently working on Six Sigma training to make the whole process Fault proof.

Outbound Logistics

As such there is no tangible outbound logistic involved in hotel service, but they consider the Satisfaction that guest carries with them while checking out from the hotel is very much important for the Hotel as future business depends on the satisfaction he has got during the stay in the Hotel.

Marketing and Sales

This area focuses strongly upon marketing communications and the promotions. Oberoi target premium class of customer and for that they prepare the offering to meet the needs of targeted customers.


They have their own sales team for bulk booking of rooms for corporate and institutional clients. They have the best marketing and sales team.

SWOT ANALYSIS OF OBEROI HOTELS.

Strengths• Strong MIS system- They have a strong Management Information

System in which they were maintaining the database of their custom-ers because of which they got to know about the tastes and preference of their customers due to which the brand value of Oberoi increases.

• Strong Marketing Teams- They have a strong marketing team due to which the awareness of Oberoi Hotel is widely spread. Since it has a second largest market share in the hospitality sector so it has to al-ways market themselves as one of the premier hotels in the country.

• Asset leverage- Another important factor for Oberoi’s is that they have no blocked their money in purchasing the hotels, they had taken on the lease due to which they got certain tax benefits and they were able to use that money in some other activity.

• Strong brand equity- Since the awareness of Oberoi’s is worldwide and brand equity is something which is an outcome of marketing ef-


Strength Weakness

OpportunitiesThreats

forts done by the company. So the brand equity of Oberoi’s is quite high in terms of sales.

• Loyal Customers- In the service oriented sector customer don’t often change their service provider unless until they saw any major changes in the service. So Oberoi’s also has their set of loyal customer which is increasing year on year.

Weakness Recent Diseconomies of scale- In the recent times because of the

recession hospitality sector has been hurt majorly. There was so much fluctuation in the economy because of which the hotel industry af-fected so much.

Room size – As compares to their competitors the room size of Oberoi’s is comparatively small because of which customer may feel of switching. Although it’s not easy to increase the room size but they can provide some extra service to their customers so that they will not think of switching.

Security system- The security system of Oberoi’s is not up to the mark. They are using same old technology which they have installed initially. So there was no up gradation in the security system because of which customers does not feel a sense of security especially after the Mumbai attacks.

Not diversified- Although the group in which Oberoi’s hotel come (East India Hotel) is itself a very large group but they all are in the ho-tel business, so they are not diversified in terms of different business because of which they suffered huge losses when recession hits the hotel industry.

Opportunities


Low debt to equity ratio financial markets (raise money through debt, etc.)- They have a very low debt to equity ratio of .82 as compared to the industry average of 1.5 so if needed they can eas-ily raise the money from the market and invest into the business.

Emerging markets and expansion abroad- There is a huge poten-tial not only in India but all over the world. So there is a huge opportu-nity for them to invest not only in India but all over the world.

Innovation- Nowadays customers want something new and to give that new company has to come up with innovative strategy like eco-friendly room because it attracts attention of the customer and it cre-ates a need of trying that particular thing.

Product and services expansion- Here product and services expan-sion means adding a product line into your existing one. Oberoi’s is in the premier class of hotels but since the market is huge for budgeted hotels as well so they can extend their product line to budgeted hotel too.

High growth rate in hospitality sector - According to the govern-ment data there is a huge growth in the hospitality sector. It is esti-mated about 14% growth till 2018 which itself is a huge growth rate in any sector.

Threats

• Competition- There is so much competition among the hotels be-cause most of the premier class hotels are in the prime location and these hotels are close to each other.

• External changes (government, politics, taxes)- There may be changes in the tax structure like in recent budget there was a tax im-posed with certain conditions like hotel accommodation, in excess of declared tariff of `1,000 per day with an abatement of 50 per cent so that the effective burden is only 5 per cent of the amount charged.


• Price wars- Price wars between the hotels are another threat for the Oberoi’s. As mentioned earlier these are located nearby so they can’t afford a big price difference and also there are some regulating author-ities (Indian Hotel Association) according to whom they have to set the tariffs.

• Threat of acquisition by ITC- The major threat for Oberoi’s is that there may be an open offer for their hotel because ITC has purchased 14.12% stake in Oberoi’s and if it crossed 15% then it will be the end for the Oberoi’s.

Valuation for Oberoi Hotels

Sales Revenue: Till 2008, Sales grew in double digits for Hotel industry, but in 2009 Sales growth rate came down to 5 %, and in 2010 it went up to 7%.

For Oberoi’s Sales grew in double digits till 208, but unlike other hotels, Oberoi’s reported negative growth rate in 2009 and 2010.

Two major reasons being: Recession caused the fall for every Hotel and the further impact was caused by turmoil in management caused by threat of hostile takeover by ITC ltd in 2010, which made Oberoi to enter into a deal of sale of stake of 14.12 % to Reliance.

After Acquisition, Reliance expects to grow by 8% in first year and aims for 15 % growth by year 2014 and aims at a growth of 15 % till 2018 as industry expects to grow at 14 % till late part of this decade.

After 2018, industry expects to grow at 8.8% till perpetuity and Reliance expects Oberoi to grow by 9 %

Cost of Revenue to fall to 40 % from 46% by means of 1% loss every year till 2016 and then to stabilize at 40%, industry average being 42%

Selling and Admin expenses to fall to 15 % as compared to industry average of 16%, currently its 18% for Oberoi.

Depreciation rate is fixed at 5%, Working capital is fixed at 12 % of Sales and Capital expenditure incurred remains 20 %till 2019 and to come down to 15


% after 2019 and to remain the same forever.

Tax rate to be fixed at 36%

Calculations of Cost of CapitalParticulars ValuesCost of debt after tax 5.8%Debt Component 1260 croresInterest 101 CroresRetention Ratio 56.28Return on Equity 20.03Dividends Paid Re 1.2Growth Rate 11.27Current Market Price 80Weight of Debt 20%Weight of Equity 80%Cost of Equity 11.7%Cost of Capital 10.5%

Calculation of Enterprise value

Particulars ValuesTerminal Value Rs.34494 CroresDiscounting Rate 10.5%Enterprise Value Rs.12617 CroresFree Cash flow to Equity Rs. 11,368 CroresIntrinsic Value of 1 share Rs 199.27Current Value of Share Rs 80Negotiation Price per share Rs.155

Total Payments to be made:

Particulars ValuesNegotiated Price for equity Rs 8842 croresDebt on books of Oberoi RS 1260 croresTotal deal price Rs 10,102 CroresCurrent Stake in EIH 14.12%Total Price to be made for 85.88 % stake Rs 8675 croresPrice to be paid to shareholders is Rs 7416 crores


Current Debt to equity ratio of Oberoi is 0.85, where as it can be raised to 1.5 on account of industry average of 1.5

So debt that can be raised through debts on Oberoi’s books of accounts being Rs 962 Crores

So rest amount of Rs 6453 Crores to be made out as cash from Reserves of Reliance industries ltd

So the deal amount stands at Rs 7416 crores as equity and Rs 1260 crores of debt on books of Oberoi books of accounts to be borne by Reliance industries.

Particulars ValuesDeal amount : Equity amount Rs 7416 CroresDebt Rs 1260 CroresTotal amount Rs 8675 CroresIn billions Rs 86.75 billionExchange Rate Rs 45/US dollarDeal amount US $ 1.93 billion

So Reliance would go for a cash buyout of Oberoi Hotels.

This amount stands equals to 41% of RIL Profits in year 2010 or equivalent to 5% of the entire Reliance reserves and surplus.

Post Merger Financial Ratios:

Debt to equity ratio for Reliance stood at 0.46 before the deal

Post merger DE ratio For Reliance Industries Ltd:• DE ratio for Reliance pre merger is 0.46 and post merger it would

show a partial increase of 0.015

• DE Ratio post merger would be 0.475

This increase in DE ratio comes on account of increase of debt raised on Oberoi books.


Pre Merger: Earnings per share:

EPS for Oberoi’s is Rs 4.11EPS for Reliance is Rs 49.7

Post merger EPS shows synergy as Reliance would be able to bring growth in Oberoi’s

Post merger ratio stands at Rs 49.23and would go on to increase to Rs 70* till 2019

The value for 2019 is calculated on accounts that Reliance industries grow by 5% every year and Hotel business would increase at the rate as taken in discount cash flow method.

Assumption being the number of shares of Reliance remains the same till 2019.

Change in Price Earnings Ratio

Small changes in PE ratio from 20.28.4 to 20.29 given the assumption that Reliance does not increase the number of shares

PRE MERGER AND POST MERGER RATIO SHEDULE

Ratios Pre Merger Post Merger

D/E 0.46 0.475

EPS 49.7 49.3 in 2011To Rs 70 in 2019

PE 20.28 20.29


POST MERGER ISSUES Reliance has no knowledge of hospitality sector as their major

presence is in the manufacturing sector.- Reliance has a major presence in the manufacturing sector so if they come into the service sector they may have to face problem of direct dealing with the cus-tomers. Since service sector is so sensitive so they have to deal it with very prudently.

Adaptation of management may become problem.- In any merger adaption of management is very critical because the ego problem be-tween the employees arises and creates conflict. The top management people feel like they were on such top positions and after the merger they may not get that positions.

Competition with the competitor like Tata group that controls the bigger but less suave Taj hotel group.-Although the Oberoi’s has second largest market share after Tata group but still Tata as a group has a large potential to invest into the sector. So there is a huge competition between the Tata and the Reliance &Oberoi’s.

May affect the other business of Reliance Industries because RIL share price went down by 0.21 percent to Rs. 947.75 a share- The day when Reliance acquires Oberoi’s 14.12% stake the share price of RIL fall down by .21% to Rs 947.75. So once RIL took over rest of the stake their share price may fall down by much.

RIL has no in-house professional expertise in the service sec - tor- Since the service sector is so sensitive they need a professional expertise which they don’t have so this is another post merger issues which company sees as whole.

Post – Merger solutionProvide visible leadership from top management

As Reliance is going to enter into Hospitality industry, they should retain some top level management people and some important people from the Oberoi group so that it will be beneficial for the new organization as a whole. Other than this they should hire some experienced people from this industry so that they can bring this new organization to some other level by


implementing good practices by talking it into consideration that the right person fit the right position.

Ensure that goals are clearly defined and progress is tracked

A special term should be prepared to ensure that first the goals to be prepared well and than these goals are to be clearly defined and communicated by proper planning and coordination so that each individual should know what is his/ her job. They should also ensure that the each process or work is integrated and can be easily tracked so check the authenticity of the process at different level.

Ensure that the culture of new organisation matches with the culture of both organizations

Reliance should ensure that the culture of new organisation is such that the employs of both organisations can easily adapt the change in the culture and easily cope up with the change. The "cultural migration" to the desired organizational behaviour is best achieved by visible example along with continuous reinforcementAnd check that the right person fit the right position (e.g. a person from Bengal should be transfer to Oberoi Kolkata branch if the person is not willing to work in other branch). Cultural events should be conducted so that the employees retain from Oberoi group got the chance to know the other employees in the new organization.

Concentrate on key employee retention Some people may not have the same roles as before, but their value should be recognized and their egos nurtured. Upgrade your self with the best IT practises

As Reliance have lot of cash surplus available with them, so they should upgrade its processes with best IT practices so to integrate its also processes along the world which can be beneficial to both internal users as well as external users. As Oberoi security system is not up to date as compare to other 5 star hotels under this category. After 26-11 security becomes the main concern for the visitors, so Reliance should bring the best security system available with them.


Post merger benefits

• After the merger the company’s overall efficiency will increase which add value to the firm.

Better management, better staff, and new recruitment from this industry, better security, and Reliance as a brand name in its self will overall increase the efficiency of the merged organization as a whole.

• Reliance Industries market value will increase.

After merger Reliance industries market value will definitely increase as it can be seen that from the valuation analysis. It will give Reliance another way of entering into hospitality sector. Reliance as a group is almost in every sector but not in hospitality sector. It is a way of diversification for Reliance.

Reliance will get a high level entry by acquiring a well settled group.


Proposal for Acquisition of Oberoi Group by Reliance Industries Ltd

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Transcript of Proposal for Acquisition of Oberoi Group by Reliance Industries Ltd