DLF promoters to sell stake in rental arm for Rs 8,900 cr in India's biggest realty deal
MUMBAI: In the biggest foreign direct investment deal ever in India’s real estate space, Singapore sovereign wealth fund GIC agreed to acquire a 33.34% stake in developer DLF‘s rental arm DLF Cyber City Developers (DCCDL) for $1.39 billion ( Rs 8,900 crore). The proceeds will go to the Singh family, the promoters of the group.
In addition, DCCDL will also buy back Rs 3,000 crore of preference shares held by promoters in two instalments, taking the total money accruing to DLF’s promoters to Rs 11,900 crore. This entire amount, after paying requisite taxes, will be ploughed by the promoters into DLF Ltd as equity, and will be used to reduce the developer’s debt. This 6.66% stake to be bought back by DCCDL will be extinguished.
The first repurchase will happen before the closing of the GIC deal and the other a year later, DLF said in a regulatory filing. The transaction was approved at the DLF board meeting late on Friday. The two sides had in May entered into exclusive talks for a deal for DLF’s rental unit that operates nearly 27 million sq ft of commercial properties. The entire space is leased out.
In the current financial year, DLF’s rental income is estimated to be more than Rs 3,000 crore, of which around Rs 2,600 crore is expected to be generated through DCCDL. A substantial chunk of the deal proceeds, after paying tax and other charges, will be used to reduce the developer’s debt that is weighing on its financial performance.
DLF had consolidated net debt of Rs 25,898 crore as of end-June. For the quarter ended June, the company reported a more than 58% year-on-year drop in net profit at Rs 109 crore. Total income from operations rose 9% to Rs 2,211.24 crore, while finance cost grew nearly 5%.
“With this deal, DLF’s debt is expected to reduce by over Rs 10,000 crore,” said a person familiar with the matter. The promoters are also planning a qualified institutional placement that should further reduce it by about Rs 2,000 crore by the end of this financial year, he added.
DLF, the nation’s largest property developer, had announced plans of its promoters to sell a stake in DCCDL first in October 2015. The value was then estimated at Rs 12,000-14,000 crore for a 40% stake. With the latest investment, GIC has furthered its relationship with DLF as the Singapore fund had earlier invested Rs 1,990 crore for a 50% stake in the developer’s two residential projects in Delhi.
These two projects are located in the Moti Nagar area of the capital where DLF has so far developed three phases of its residential project, Capital Greens, and a commercial tower. Under the latest deal, both parties have agreed upon a mechanism for a potential stake adjustment of up to 0.58% in DCCDL at three years from the closing of the transaction, if certain terms and conditions of the agreement are not met.
The stake sale plan had initially attracted interest from around 25 investors and the list was then shortened to half a dozen. However, in February 2016, in backdrop of weak market conditions, the company extended the deadline by deferring conversion of the compulsorily convertible preference shares to promoters until March 18, 2017 with the same terms and conditions.
“Once the GIC deal is concluded, the promoters are expected to pump in capital into the company (DLF) and with that the promoter’s holding is likely to increase beyond the maximum 75% that markets regulator Sebi allows promoters to hold in public companies,” said the person who spoke about the company’s QIP plan.
Therefore, the company is expected to sell a stake to institutions though QIP to bring down promoter shareholding to below 75%. This is also expected to bring in some more funds, which the company is likely to utilise to reduce the debt further. DLF has also decided to raise up to Rs 2,500 crore through non-convertible debentures and other debt instruments.
The GIC deal comes at a time when Indian real estate is witnessing a robust rise in investment inflow as both foreign and domestic institutional investors are infusing more funds into the sector. Large global institutional investors, including Blackstone Group, Brookfield Asset Management, GIC, CPP Investment Board, Goldman Sachs and Qatar Investment Authority have invested aggressively in India’s real estate assets over the past few years.
In addition to this, more funds are eyeing investment and alliance opportunities in the backdrop of recent reforms that made rules easier. While these entities had earlier shown interest in investing in commercial real estate, they are now looking at other segments also such as residential, retail and hospitality. Last year, Brookfield Asset Management concluded an agreement to acquire the Hiranandani Group’s offices and retail space in the Powai suburb for around $1 billion, making it India’s largest office space transaction before the DLF deal.