MUMBAI (Reuters) - Indian Hotels Co Ltd's (IHTL.NS) unsolicited and unexpected $1.2 billion bid for luxury hotel group Orient-Express Hotels Ltd OEH.N, which it has long coveted, sent shares in the company controlled by the Tata conglomerate falling more than 5 percent.
The bid may prove to be the last bold act by Tata group Chairman Ratan Tata before he retires at the end of this year, and marks a rare hostile approach from an Indian company.
The scion of the Mumbai-based Tatas, India's most prominent business family, has built the software-to-steel conglomerate into the country's biggest business house through a series of large overseas acquisitions.
But the group has a mixed record on deals, and investors greeted the offer for Orient-Express, priced at a 40 percent premium, with wariness. Indian Hotels would also assume Orient-Express debt, about $530 million at the end of June.
Indian Hotels has bought several overseas properties, including the Pierre in New York, but they have not tended to perform as well as its domestic operations, which include its flagship Taj Mahal Palace in Mumbai.
"Generally, acquisitions for Indian Hotels have not been rewarding for the company," said Niraj Mansingka, an analyst with Edelweiss Capital in Mumbai.
Orient-Express owns a global portfolio of properties including the Hotel Cipriani in Venice and the 21 Club in New York, but its heavy exposure to the sluggish European economy has crimped growth.
"It seems clear to us that (Indian Hotels) wants to position itself as a global hospitality chain," JPMorgan analysts wrote.
Indian Hotels was rebuffed in an attempt to strike an alliance with Orient-Express in 2007, and again in August.
In its $12.63-a-share takeover bid, Indian Hotels has secured the backing of the former CEO of Orient-Express, Paul White, and Luca Cordero di Montezemolo, chairman of Italian sports car maker Ferrari and a close friend of Ratan Tata.
Shares in Orient-Express, which is headquartered in Bermuda, rose as much as 41 percent in New York after the bid was announced on Thursday, closing at $11.05, up 22.5 percent.
The Tata group has been at the forefront of an overseas acquisition binge by Indian companies that started in 2007 and has delivered uneven results.
Tata Motors Ltd (TAMO.NS) made one of India's signature buys when it paid $2.3 billion in 2008 for British luxury car maker Jaguar Land Rover, a heavily-leveraged deal whose wisdom was questioned at the time but has proven to be a winner.
Tata Steel Ltd's (TISC.NS) $12.7 billion takeover in 2007 of Anglo-Dutch steelmaker Corus, India's largest outbound deal, has been less successful, with the European steel sector plagued by overcapacity, high costs and broader economic troubles.
"Those acquisitions have created very anxious moments in shareholders," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors Ltd in New Delhi.
"Considering that, (it) needs to be seen how far Indian Hotels group would like to stretch themselves," he said.
Another Indian conglomerate, the unlisted Sahara group, has also been buying up trophy hotels, including London's Grosvenor House and, more recently, the Plaza Hotel in New York.
Orient-Express confirmed in a statement late on Thursday that it had received the proposal and would evaluate it. The company has a dual share structure that would make a hostile takeover hard to pull off.
Under the proposed deal, the Charme II Fund, managed by the Ferrari chairman's Montezemolo and Partners S.p.A, would invest $100 million for a minority stake in the newly combined group.
Indian Hotels would contribute $650 million in cash while the rest would be funded by other Tata group entities and debt from ICICI Bank (ICBK.NS), Standard Chartered Bank (STAN.L) and Bank of America-Merrill Lynch (BAC.N), which is also advising it on the deal.
Indian Hotels bought a 10 percent stake in Orient-Express in 2007, and it now owns about 7 percent.
One analyst at a Mumbai brokerage who tracks Indian Hotels and declined to be identified said the takeover proposal does not look attractive for the Mumbai-based company's shareholders, partly because of the debt that Indian Hotels is already carrying.
Indian Hotels, with a market value of $1 billion, had net debt of 35.7 billion rupees ($672 million) at the end of March, up 5 percent from a year earlier.
"It will be earnings dilutive and worsen the debt profile in a troubled business environment. Orient-Express gets a third of its revenue from Europe, which is facing problems," the analyst said.
"Paying 40 percent premium for a property in a low-growth region is probably not a great idea in this environment." ($1 = 53.1250 Indian rupees)
Editing by Ryan Woo