Lagatar24 Desk
New Delhi, July 24: ITC Ltd.’s board of directors gave its in-principle approval on Monday to the demerger of its hotels business under a scheme of arrangement, with the company owning a stake of about 40% in the new entity and its shareholders owning the remaining shareholding of about 60% directly and in proportion to their ownership stakes in the company.
The proposed reorganisation would ensure ITC’s continued interest in the hospitality industry, provide long-term stability and strategic support to the new entity in its pursuit of accelerating growth and sustained value creation, as well as enable leveraging of cross synergies between the company and the new entity, the company stated in a press release.
The company’s board of directors met on Monday to discuss and analyse potential new business models for the hotels in order to create the next phase of growth and maximise value creation for all parties involved.
The hotels business, it was noted, has “matured over the years” and is well positioned to chart its growth path as a separate entity in the quickly expanding hospitality industry with a sharper focus on the business and an ideal capital structure while continuing to leverage ITC’s institutional strengths, brand equity and goodwill.
The demerger will enable the new firm in attracting suitable investors and strategic partners/collaborations whose investment strategies and risk profiles are more closely in line with the hospitality industry, according to the announcement.
Additionally, by giving the shareholders of the company a direct stake in the new entity and an independent market-driven valuation of it, it will enable them to unlock the value of the hotel’s operation. The company’s action also supports the more focused capital allocation approach of recent years, which is seen in the hotel industry’s switch to an “asset-right” strategy.
The price of ITC stock on the BSE on Monday was 2.75 percent down at Rs 476.40.
“The proposed demerger of the hotels business is testament to the company’s commitment to creating sustained value for stakeholders. Creation of a hospitality focused entity will engender the next horizon of growth and value creation by harnessing the exciting opportunities in the Indian hospitality industry. In the proposed reorganisation, both ITC and the new entity will continue to benefit from institutional synergies,” Sanjiv Puri, ITC chairman, said in the statement.
At the board meeting scheduled for August 14th, specifics of the planned reorganisation, including the scheme of arrangement, will be presented for approval.
In order to move the planned rearrangement forward, the board has also approved the creation of a wholly owned subsidiary to be known as ITC Hotels Ltd or another name that may be approved by the Ministry of Corporate Affairs.
ITC’s hotel division has had substantial growth in terms of room inventory, revenue and profitability during the past 20 years. 11,600 keys are currently spread across more than 70 locations and over 120 hotels. After achieving a significant level of scale and market dominance, the company switched to an “asset-right” model in 2017, which calls for a significant portion of incremental room expansions to accrue through management contracts.
The Indian hospitality sector has recovered significantly after two years of interruptions brought on by the pandemic, with notable increases in hotel rates and occupancy. ITC’s hotel division has grown stronger, achieved growth and margin expansion in FY-23, and is well-positioned to maintain the growth momentum, the release stated.
