ITC To Demerger Its Hotel Business, Stock Pullback From 1-Year High To End 4% Lower

FMCG giant, ITC witnessed a heavy selloff on Monday after the board of directors gave in-principle approval for the demerger of the company's hotel business. The proposal will be placed for approval in August month. Further, the board has approved to incorporation of a wholly-owned subsidiary.

On BSE, ITC's share price closed at Rs 470.90 apiece, down by Rs 18.95 or 3.87%. The stock ended near its intraday low of Rs 468 apiece.

However, it needs to be noted that, in the first half of Monday's trading session, ITC shares had hit a new 52-week high of Rs 499.60 apiece.

ITC's board of directors held a meeting on July 24 to evaluate and discuss various alternative structures for the hotel business.

As per the regulatory filing, ITC's board noted that the company's hotel business has matured over the years and is well poised to chart its own growth path as a separate entity in the fast-growing hospitality industry with a sharper focus on the business and an optimal capital structure, whilst continuing to leverage ITC's institutional strengths, brand equity and goodwill.

Accordingly, after due consideration, ITC said, "the Board accorded its in-principle approval to the demerger of Hotels Business under a scheme of arrangement, with the Company holding a stake of about 40% in the new entity and the balance shareholding of about 60% to be held directly by the Company's shareholders proportionate to their shareholding in the
Company."

In a statement, ITC said, "The proposed reorganisation would ensure continued interest of the Company in the hospitality business, provide long-term stability and strategic support to the new entity in its pursuit of
accelerating growth and sustained value creation as also enable leveraging of cross synergies between the Company and the new entity."

Further, the demerger is expected to help the new entity in attracting appropriate investors and strategic partners/ collaborations whose investment strategies and risk profiles are aligned more sharply with the hospitality industry. In addition, it will unlock the value of the hotel business for the Company's shareholders by providing them with a direct stake in the new entity along with an independent market-driven valuation thereof. This move by the Company also reinforces the sharper capital allocation strategy put in place in recent years, manifesting in the pivot to an 'asset-right' strategy in the Hotels Business.

Sanjiv Puri, Chairman of ITC said, "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 reorganization, both ITC and the new entity will continue to benefit from institutional synergies."

Further, as per the regulatory filing, the scheme of arrangement shall be placed for approval of the Board at its next meeting to be convened on August 14, 2023.

Also, to progress the proposed reorganisation as aforesaid, ITC's board members approved
incorporation of a wholly owned subsidiary ("WOS") of the Company.

The new wholly-owned subsidiary will be incorporated as 'ITC Hotels Limited'. It added, the application for incorporation of the WOS is in the process of being filed and will be completed once the Ministry of Corporate Affairs approves the incorporation of the WOS.

For the new subsidiary, the company will be paying cash consideration for subscribing equity shares having a face value of Re 1 each at par, but not exceeding Rs 100 crore in aggregate. ITC will own 100% of the issued and subscribed share capital of the WOS at the time of incorporation.

The main business of the WOS would be hotels and hospitality business.

Despite the selloff on July 24th, ITC shares have performed better than peers so far in 2023. Year-to-date, the stock has gained by over 41.5%. In a year, the upside is more than 56% on BSE.