Taj acquisitions destroyed economic value: Mistry
Mistry objects to Chandra's comments in annual report
Former Tata Sons chairman Cyrus Mistry has replied to some charges against him in Indian Hotels Company’s (IHCL’s) latest annual report, which said he, after being ousted as the Tata group boss, had made an incorrect assessment of IHCL’s losses in the past few years.
The Directors’ report, signed by Tata Sons Chairman N Chandrasekaran on behalf of the board of directors, said that some of Mistry’s statements against IHCL and its governance were “incorrect” and “made without exercising proper care”.
Mistry responded to the statements in the annual report, saying it was “important to set the record straight”.
In the report, Chandrasekaran wrote to shareholders that allegations were made in relation to acquisitions and divestments by IHCL and its financial condition. He said the company had made strategic investments both overseas and in India to promote the 'Taj' brand and expand its business, and a number of these investments were made before the financial crisis of 2008-09, when the markets were buoyant. “The 'black swan' event of collapse of the global markets in 200809 had an adverse impact on the hotel industry, not just in India but globally and this led to decline in the underlying asset values of the investments,” he added.
In some cases, the annual report said, the company was forced to sell properties at a loss while in other cases, it took write-downs in accordance with applicable accounting standards.
Allegations were also made on terms of the lease for The Pierre (hotel) in New York, the report said. "One should note that the lease terms of The Pierre have remained largely unchanged for a long period,” Chandra wrote. The report added that the hotel was run and operated on almost similar terms by earlier operators including Four Seasons, and was thus available to the company only on similar terms. The company entered into the lease deal for the strategic value it would add.
Chandra also referred to the questions that were raised about the Sea Rock acquisition, and said that it was of strategic importance to the company, due to its unique location, synergy with the existing Taj Land’s End Hotel, and economies of scale. “The timing of the acquisition of the Sea Rock property was just before the 26/11 terrorist attacks in Mumbai and the collapse of the global markets in 2008-09,” Chandra added.
Consequently, taking cognizance of the changed business realities, it was decided to insulate the acquisition and incubate the asset in a separate company, till such time as sector sentiment improved, while pursuing design development and residual approvals. Also, the original owner still has a 15 per cent stake in the property and was responsible for getting all approvals. IHCL had also originally planned to get an international partner and for this reason, this subsidiary was created. In any event, since then, the apex holding company for the Sea Rock property was made a 100 per cent subsidiary and amalgamated into the company.
Chandra also wrote that the IHCL board had monitored the events during the leadership transition and its audit committee reviewed the company's interventions, the processes implemented and followed with respect to various compliances, and disclosures and the rigours applied when such strategic investment decisions were taken.
Reacting to these statements, Mistry said the acquisition of the Sea Rock, The Pierre, Taj Boston, and Orient Express Hotel, and the launch of the Ginger brand, among others, had destroyed IHCL’s economic value over the past 10 years. All these decisions were made before Mistry became chairman.
“The company has faced a near·death experience and over the last four years has had to take write·downs amounting to nearly its entire net worth. Dividends to the shareholders have been impacted and these decisions have put the welfare of the employees at risk,” he said.
Mistry said he had raised questions regarding the appropriateness of the global strategy. He said his comments were made on detailed and specific facts, and were backed by documentary proof. Mistry said Chandra’s explanation on The Pierre and some of the pre2008 transactions being adversely impacted by the economic slowdown and bad timing were “incorrect and hardly explain evident acts of mismanagement”. What it does not say is that IHCL ended up spending over $100 million on renovation, multiples higher than what had been originally planned at the time of acquisition, he added.
Mistry said it was common knowledge before The Pierre acquisition by IHCL that Four Seasons continued to lose money in running the Pierre hotel before 2008 when the US market was strong. “Today the revenue of the Pierre Hotel has recovered to its pre·2008 levels and so has the economy come out of recession, and yet it continues to suffer significant losses,” he said.
Mistry also said the report talked about the decision about the Sea Rock being a strategic decision, and also was impacted by the “vague 2008 crisis”. “Sea Rock indeed is a property that has strategic value to IHCL and will create value only over the very long term. However, the price of purchase was evidently way too high. Besides, regardless of the 2008 crash, which occurred later in time, this acquisition was housed in an off-balance sheet structure and upon folding it into IHCL, a large impairment has had to be acknowledged. Again, this is borne out by both facts and figures,” he added.
“Finally, it is pertinent to note that a company may make strategic errors as part of their journey. But when one has a consistent pattern of value destroying strategic decisions, all being defended blindly with vague assertions, it is indeed time for shareholders to question,” Mistry said.