A deal more than one year in the making with GIC has finally paved the way for DLF to drop its debt level to a decade-low.
A deal more than one year in the making with GIC has finally paved the way for DLF to drop its debt level to a decade-low. In the next three months, DLF is expected to lower its debt of Rs 26,000 crore to approximately around Rs 13,000 crore. According to Bloomberg, the last time DLF’s debt was in the range of Rs 13,000 crore was in March 2008 when the company had Rs 12,250 crore of debt. On average, in the last 10 years, DLF’s debt has been approximately Rs 22,500 crore. On Sunday, in one of the largest real estate FDI transaction, GIC acquired 33.34% stake in DLF’s rental arm, DLF Cyber City Developers (DCCDL) for $1.39 billion, or Rs 8,900 crore. Additionally, DCCDL will also buy back Rs 3,000 crore of preference shares held by the promoters, which then totals to Rs 11,900 crore. Post tax, it is expected that Rs 10,000 crore will be invested back into the parent company as fresh equity infusion and used primarily to reduce its burgeoning debt.
Procedurally, the deal will now need shareholders’ as well as CCI approval although the timeline for concluding it has been set at November end, according to the management. Moreover, upon completion of the GIC deal, DLF will further raise Rs 3,000 crore through an institutional placement because as per SEBI guidelines, promoters of public companies can hold a maximum of 75% stake. “Our focus will be to pare down debt in the parent company, de-leveraging it significantly as well as simplifying the structure of our businesses, wherein we single-handedly will run the residential arm and partner with GIC to expand our commercial portfolio,” said Saurabh Chawla, executive vice president, finance, DLF. “Along with monetizing our existing commercial pipeline, tapping into newer markets, like Mumbai and Bengaluru, will be high on our agenda,” Chawla added.
Although the management did not confirm, a back-of-the-envelope calculation suggests that capitalization rate on the transaction has been in the range of 8%, which is in keeping with ‘Grade A’ quality commercial assets. In the deal, rent yielding assets of 27 million sq.ft. were considered, with development potential of another 21 million sq ft. Incidentally, GIC is no stranger to the group. Two years back, it invested approximately Rs 2,000 crore to develop two residential projects with DLF in New Delhi. With the conclusion of this transaction, DLF joins the likes of K Raheja Corporation and Prestige Estates – companies that have recently regrouped assets such that the commercial and residential pieces can be run as individual entities. In the past three to four years, institutional funds have been on the prowl, targeting companies that have a portfolio of Grade A quality income-generating assets that assures a steady stream of income. Companies, such as Embassy Developers, K Raheja Corporation, Phoenix Mills and RMZ, have joined hands with the likes of Blackstone, CPPIB and QIA. GIC, a major contender among foreign funds, has negotiated some of these deals but finally sealed it with DLF.
After reducing its debt, DLF will have strong financials to back its portfolio and once the residential segment recovers, the company will be in a better position to dominate, said one sector analyst in a foreign brokerage. In the thick of the current slowdown being witnessed in the housing market, for the quarter ended June, DLF’s revenue increased just 9% on a year-on-year basis to approximately `2,200 crore, whereas its profit slid 58% to about Rs 109 crore.