ITC shares: Should shareholders vote for or against hotel demerger on June 6

Proxy advisory firm Institutional Investor Advisory Services (IiAS) has advised investors to vote against ITC's proposed scheme of arrangement for the demerger of hotels business into ITC Hotels. Stakeholders Empowerment Services (SES) and InGovern, two other proxy advisory firms, on the other hand, felt shareholders should vote for the scheme of arrangement, as a clean swap of shares is beneficial for the minority shareholders as well as for the growth of both the companies.

The demerger move only partially unlocks value and the proposed structure, said IiAS. It said the demerger is designed to enhance ITC’s return ratios but offers neither a complete value unlocking for equity shareholders nor does it materially cut any capital support responsibilities for the hotel business from ITC.

It felt the ITC board has not clearly articulated its plan for the 40 per cent holding in the hotels business – whether it proposes to eventually sell the equity to a strategic buyer or continue to hold it, is unclear.

"The company’s argument of synergies between the hotels business and its other agri and FMCG businesses is not materially reflected in the inter-segment revenues of its segmental reporting; further, the synergies are likely limited by the size of the hotel business revenues, which is ITC’s smallest and accounts of 3 per cent of ITC’s aggregate revenues, as is the argument for manpower mobility," IiAS said.

SES finds no issue on valuations as shareholding of hotel business will be mirror image of ITC (60 per cent) . It said divestment of 60 per cent only is beneficial to shareholders given new company will need continuity as well as strategic support. ITC will be able to realise control premium in future, it argued.

As per the arrangement, ITC shareholders would receive a direct stake in a dedicated, publicly traded hotel entity, becoming shareholders of a specialised company focused solely on the hotel business. The move aligns with ITC's corporate strategy of fostering multiple growth drivers, ensuring continued interest in the hotel sector, and protecting against potential hostile takeovers in the future.

"It establishes a solid foundation for accelerated growth and sustained value creation by offering long-term stability and strategic support to the hotel company. The structure of ITCHL will enable partnerships with strategic or financial investors. Given that the hotels business is capital-intensive, the existing shareholders of ITC will benefit from a reduced strain on cash and ROCE under the current structure of funding the hotels segment, InGovern said.

InGovern said the separated business would then have the ability to raise and allocate its own capital to finance the growth of the hotels business, ensuring it remains competitive among its peers

"With this capital allocation strategy, ITC will benefit with better return-ratios on non-hotel business segment and higher cash retention which could be used to fund its core business or pay higher dividend. Ensures ongoing access to cross synergies between ITC and the hotel company. The hotel company will continue to benefit from ITC's established institutional strengths, brand equity, and goodwill.

NCLT recently directed convening a meeting of shareholders of ITC on June 6 to consider and approve the demerger scheme. The FMCG giant approved the hotels segment demerger in August 2023 and has already obtained no-objection from stock exchanges. ITC's hotels division has added 24 hotels in the last two years and Morgan Stanley said the segment plans to open 27 in the next two years.

IiAS said ITC has argued that hotels business has matured and that it will be able to raise capital – both debt and equity – on
its own. "While this may be reflected in the strength of its recent performance of the business, the hotels business inherently carries high operating leverage and revenue volatility and may, over the years, need capital support from ITC Limited as its promoter". The proxy firm cited the case of Indian Hotels Company Ltd., one of ITC's competitors, which has raised equity totaling Rs 3,980 crore in the last five years.

InGovern said with this capital allocation strategy, ITC will benefit with better return-ratios on non-hotel business segment and higher cash retention that could be used to fund its core business or pay higher dividend.

It ensures ongoing access to cross synergies between ITC and the hotel company, it said adding that the hotel company will continue to benefit from ITC's established institutional strengths, brand equity, and goodwill.