DLF-DAL merger: Promoters to gain

DLF-DAL merger: Promoters to gain
The Economic Times, December 18 2009

Supriya Verma Mishra , ET Bureau

It’s that feeling of deja vu. Delhi-based real estate developer DLF has announced a merger of its commercial realty arm DLF Assets (DAL) with itself — a move aimed at repaying some of DAL’s debt.

This merger is also aimed at consolidating all commercial properties under DLF, which will help add an annual income of close to Rs 500-600 crore in the form of lease rentals from 2009-10. DAL currently earns around Rs 325 crore from lease rentals.

The new structure involves the merger of DLF subsidiary DLF Cyber City Developers with Caraf Builders and Constructions, which is the holding company of DAL. The valuation ratio approved by the board for Cyber City and Caraf is in the ratio of 60:40.

This means that DLF shareholders will have access to 60% and promoters to 40% of the merged entity. However, this will be a cashless transaction.

DLF sells commercial property to DAL, which is controlled by KP Singh who owns 78% in the latter along with his son and DLF promoter Rajeev Singh. DAL buys commercial property from DLF and collects lease rentals from it. With this merger, the debt on DLF’s books would be an additional Rs 2,460 crore.

Caraf, along with its subsidiaries, has four 3.3 million sq ft rent and a majority stake in DAL, which owns four SEZ properties with total leased area of 6.4 million sq ft. On the other hand, Cyber City has 6.7 million sq ft of built-out space across commercial buildings in Gurgaon and two operational malls in Delhi. Cyber City can further develop commercial and retail space in Gurgaon and Mumbai.

Due to non-availability of detailed numbers, we did some back-of-the-envelope calculations. Cyber City has a rental and development income of Rs 1,450 crore for FY09. The value of this company after the debt consideration comes close to Rs 11,300 crore, about 10 times its profit of Rs 1,100 crore. Capitalising DAL’s rental income at an average 10% capitalisation rate and considering a net debt of Rs 2,460 crore, DAL could be valued at roughly Rs 3,050 crore.

It shows that though the promoter’s share has come down in DAL, this merger provides access to high-rental yielding land. Whether the merger will really work out for the shareholders or not is yet to be clear, but it should certainly work out to the advantage of the promoters.