DLF may buy DE Shaw’s $400m stake in DAL
The Economic Times, March 24, 2009, Page 17
Our Bureau NEW DELHI
THE country’s largest realty company, DLF, is likely to buy hedge fund DE Shaw’s $400 million investment in DLF Assets (DAL). DLF declined to comment citing ‘silent period’ requirement before earnings announcement. DAL is a DLF promoter group company that purchases commercial properties from DLF.
The Rs 2,000 crore fund required for the transaction is likely to be raised by DAL itself by mortgaging the lease rental it is expecting to generate through its properties. DAL owes around Rs 5,400 crore to DLF. If DAL manages to payback a part of what it owes to DLF then the total receivable from DAL will come down, but it will not ease cashflow at DLF, analysts say.
This is because the extra cash will be used to payoff DE Shaw. DE Shaw investment in DAL, which is through mezzanine finance route for a fixed time period, is close to maturity and the investment fund is seeking redemption. DLF executives have said in the past that DAL will be able to raise Rs 2,000 crore either through private equity route or lease rental discounting in the current quarter. The company has so far not closed any equity deal and is working with banks to raise debt.
DLF’s increasing receivables from DAL has been the single-biggest concern among investors and analysts. DAL, originally planned as real estate investment trust (REIT) to be listed on Singapore stock exchange, has investments from DE Shaw ($400 million) and UK-based investment fund Symphony Capital ($650 million).
The biggest issue with raising investment in DAL is its valuation in a falling property market. The cap rate of property of the company has gone up from 9% in 2007 to 13% now. Higher cap rate means lower valuation for a property. On the existing cap rate, DAL valuation has dropped from $2.24 billion to $1.55 billion.
DAL is expected to have 9.5 million sq ft of assets by the end of this month, estimated to earn Rs 600 crore in annual rentals. There has been reports of DLF looking at acquiring DAL or converting its complete receivables from DAL into equity. But, as one real estate analyst with a Mumbai-based brokerage said: “Post Satyam, valuations of promoter owned companies has become a tricky issue, especially those involving transactions with a public listed company of the promoters themselves.”
Some analysts are of the view that conversion of debtor stake into DAL equity will make sense for DLF as well as DAL. At 13% cap rate, DLF will get 44% stake in DAL in lieu for its entire receivables. “DAL shareholders stake post the transaction will be diluted. However with DLF converting its debtor stake into equity, the transaction reduces overall repayments, thus boosting the enterprise value of DAL. Also with this transaction DAL will remain completely equity funded, and thus can conserve leverage if it wishes to execute the additional 7 million sq ft of balance contract with DLF,” said JP Morgan in its report a fortnight ago.
The Economic Times, March 24, 2009, Page 17
Our Bureau NEW DELHI
THE country’s largest realty company, DLF, is likely to buy hedge fund DE Shaw’s $400 million investment in DLF Assets (DAL). DLF declined to comment citing ‘silent period’ requirement before earnings announcement. DAL is a DLF promoter group company that purchases commercial properties from DLF.
The Rs 2,000 crore fund required for the transaction is likely to be raised by DAL itself by mortgaging the lease rental it is expecting to generate through its properties. DAL owes around Rs 5,400 crore to DLF. If DAL manages to payback a part of what it owes to DLF then the total receivable from DAL will come down, but it will not ease cashflow at DLF, analysts say.
This is because the extra cash will be used to payoff DE Shaw. DE Shaw investment in DAL, which is through mezzanine finance route for a fixed time period, is close to maturity and the investment fund is seeking redemption. DLF executives have said in the past that DAL will be able to raise Rs 2,000 crore either through private equity route or lease rental discounting in the current quarter. The company has so far not closed any equity deal and is working with banks to raise debt.
DLF’s increasing receivables from DAL has been the single-biggest concern among investors and analysts. DAL, originally planned as real estate investment trust (REIT) to be listed on Singapore stock exchange, has investments from DE Shaw ($400 million) and UK-based investment fund Symphony Capital ($650 million).
The biggest issue with raising investment in DAL is its valuation in a falling property market. The cap rate of property of the company has gone up from 9% in 2007 to 13% now. Higher cap rate means lower valuation for a property. On the existing cap rate, DAL valuation has dropped from $2.24 billion to $1.55 billion.
DAL is expected to have 9.5 million sq ft of assets by the end of this month, estimated to earn Rs 600 crore in annual rentals. There has been reports of DLF looking at acquiring DAL or converting its complete receivables from DAL into equity. But, as one real estate analyst with a Mumbai-based brokerage said: “Post Satyam, valuations of promoter owned companies has become a tricky issue, especially those involving transactions with a public listed company of the promoters themselves.”
Some analysts are of the view that conversion of debtor stake into DAL equity will make sense for DLF as well as DAL. At 13% cap rate, DLF will get 44% stake in DAL in lieu for its entire receivables. “DAL shareholders stake post the transaction will be diluted. However with DLF converting its debtor stake into equity, the transaction reduces overall repayments, thus boosting the enterprise value of DAL. Also with this transaction DAL will remain completely equity funded, and thus can conserve leverage if it wishes to execute the additional 7 million sq ft of balance contract with DLF,” said JP Morgan in its report a fortnight ago.
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