India's Sahara bids for New York's Plaza Hotel

DELHI -- A bid for The Plaza Hotel in New York City by Sahara India Pariwar in June sparked conversations about big companies in India investing in the hospitality industry abroad -- and whether this made business sense since  hotels take a long time to yield profits or break even.

The Sahara Group, based in Lucknow, is a huge-diversified conglomerate with dealings in infrastructure, media, finance, manufacturing and information technology. The company, started by Subrata Roy with $43 in 1978, is now one of the largest employers in a country of 1.2 billion people.

The Indian media reported in June that Sahara will buy 75% stake in the Plaza Hotel for $570 million.The luxury hotel, on the corner of Central Park South and Fifth Avenue, is perhaps the most famous after the Waldorf Astoria. It is currently owned by Saudi-based Kingdom Holdings Co. and Elad Properties, an Israeli real estate company. Elad has reportedly agreed to sell its stake while Kingdom Holdings Co. will retain 25% its stake.

Several experts were critical of Sahara’s bid and, more generally, of buying big hotels abroad. In 2010, Sahara bought London's Grosvenor House Hotel. Now, the company is reportedly negotiating to buy some Marriott Hotels in London as well. In recent years, Tata Group has bought The Pierre on Fifth Avenue in New York as well as the Boston Ritz Carlton.

Sushil Gupta, chairman of Asian Hotels (West) Limited, which runs five star hotels in India, finds these investments as absurd. “So if you want to make some kind of statement go ahead but it makes zero business sense…do you see Warren Buffett making these kind of deals?” he says.

Other observers, however, feel that the Sahara Group wouldn’t invest this kind of money without a plan. “Hotels are a cash rich business albeit with a long gestation period,” says Pavethra Ponniah, from ICRA, which provides investment information and credit rating services in India. "The overseas investment by domestic companies help establish the brand globally," she adds.

Experts also feel that the Sahara Group doesn’t have the same level of management expertise as Taj and Oberoi, which run world-class hotels in India. On the other hand, Sahara Group owns Sahara Star in Mumbai, which has mixed reviews. But under the deal being negotiated, Fairmont Hotels & Resorts Inc, which currently manages the property, will reportedly continue to do so for the next two years.

"It remains to be seen whether the group would venture into actively managing these properties in the future," says Ponniah from ICRA. "The group's hospitality bandwidth would get stronger over a period as its scale of operations both domestic and overseas, expand."

Despite the reservations expressed, Vir Sanghvi, a regular commentator on the hotel industry, asked why not. “It makes sense,” he says. “The group has been looking for trophy properties around the world.”

Sanghvi also pointed out that Indians only have a “small” slice of the hotel industry abroad. “At a time when the world’s hotel chains are desperate to open properties in India, it makes no sense for Indians to focus on hotels abroad when there are so many opportunities at home,” he says.

While a great deal is said about Indians buying up expensive properties, Sanghvi doesn’t see it as significant. “Does anybody who stays at the Dorchester in London care that it belongs to the Sultan of Brunei?” he said. “Does anybody who stays at a Four Seasons even remember that Prince Alwaleed owns half the company?”

But perhaps Sahara’s recent bid is telling of a far broader investment trend in areas ranging from telecom and steel to oil and natural gas. Consider this report recently published by the Indian School of Business, which finds that India’s Outward Foreign Direct Investment increased from $1 billion in 2001-2002 to $18.5 billion in 2007-2008- although it recently slowed down due to the economic crisis.

Some companies even have a Transnationality Index (TNI) of more than 50% similar to transnational corporation of the developed world. The TNI is made up of percentage of international assets to total assets, percentage of international revenues to total revenues and percentage of overseas employees to total employees. The study finds that most Indian companies are expanding through the route of Mergers and Acquisitions.

Companies of the Tata Group, which owns Jaguar Land Rover, Tetley Tea and British steel maker Corus, are the most internationalized. Tata Group now earns 58 percent of it revenues from abroad while Reliance Industries Ltd. gets 64% of its revenue from outside.

Observers, however, worry about international investments overshadowing domestic ones in the future. They say that top Indian companies are sitting on piles of cash but consider investing domestically too tedious. Experts warn that unless the regulatory delays and bureaucratic red tape isn’t sliced, Indians will increasingly take their investments, especially intangible assets, abroad. With foreign investments on the home turf shrinking, Indians taking their business outside will be a further blow to the economy especially in terms of job creation.

On a lighter note, observers say that Indians are naturals in the hospitality industry. Interestingly, a new book by Pawan Dhingra, a professor who will be joining Tufts University, says that Indian-Americans own almost half the motels in the United States. The majority of them are originally from the state of Gujarat in India.

A excerpt of the book, Life Behind the Lobby: Indian American Motel Owners and the American Dream, published in NPR reads, “Morning and night, Mr. Patel, an immigrant from the Indian state of Gujarat, manned the front desk and did repairs on a 60-room Econo Lodge in Bordentown, New Jersey, while his wife, Indu, and two children hauled suitcases, made up beds, and vacuumed rooms. And the work paid off. At age 57, Mr. Patel owns not only the Econo Lodge but, with relatives, four other hotels. . .At hotel schools like those at Cornell University, New York University, and San Diego State University, as well as more general business schools, the children are studying how to manage chains of hotels, work in corporate offices of name-brand franchisors, and acquire more upscale properties like Marriott and Hilton. Call them the Cornell hotel Patels.”

Photo: The Plaza Hotel

This post was originally published on Smartplanet.com