Bangalore: Property developer BPTP Ltd and JPMorgan Chase and Co. have asked consultants DTZ International Property Advisors and Jones Lang LaSalle India to value the real estate company’s assets.
Harbour Victoria Investments Holdings Ltd, an affiliate of JPMorgan, acquired a 3.86% stake in the Gurgaon-based company for Rs 215 crore in 2008 and Rs 26 crore in 2009, according to a draft red herring prospectus that BPTP filed in end-2009 for a proposed Rs 1,500 crore initial pubic offering (IPO).
Ongoing negotiations: BPTP property in Faridabad Photograph by Ramesh Pathania/Mint
Once the valuation is done, both sides will negotiate and reach a strategic decision on how to facilitate the exit of the investor, said two people familiar with the development.
BPTP has a so-called put option agreement with the JPMorgan affiliate company with 8 July as the IPO deadline, said a 2011 research report by Nomura Financial Advisory and Securities (India) Pvt. Ltd.
The put option agreement obligates the promoter to buy back the investors’ share at a certain price at a future date. Typically, such an option is part of shareholders’ agreement when investors put money in unlisted entities.
Typically, an investor exits when the firm sells shares to the public. If an IPO doesn’t happen, like in the case of BPTP, promoters buy back the shares to protect the investors’ interest.
“Our talks with JPMorgan are at a very nascent stage, and it would, therefore, be premature for us to comment on the same. Currently, both parties are evaluating the propositions and future strategies,” a BPTP spokesman said in an emailed response.
JPMorgan, in an emailed response, declined to comment.
While there are multiple options for an exit, BPTP may either buy back the stake itself or find another investor to replace JPMorgan, said one of the two people cited above.
Since March 2006, private equity (PE) funds have infused $10.2 billion into real estate companies and projects in India, out of which $8.2 billion was invested in 2006-08, when the real estate sector was passing through a boom period, said the Nomura report. These investments were, hence, quite possibly made at valuations much higher than today.
With most PE investments in real estate being for three-five years, many of the investments made then are expected to see exits over the next two years. Apart from generating cash flows to repay or refinance their debt burden, developers will also need to buy out PE investors in such cases.
BPTP had said in its draft prospectus that one-fourth of the IPO’s proceeds would be used for repayment and advance retirement of debt.
The company, which has a current debt of Rs 900 crore, withdrew the IPO application this year. Analysts said most real estate firms don’t consider market conditions suitable for a share sale to the public.
BPTP may either raise debt against its projects as collateral to buy back JPMorgan’s shares or convert BPTP shares into a project level stake, maybe at higher returns, say analysts.
“Exits can happen in many ways and may take nearly six-nine months. There can sometimes be a partial exit where the developer can buy back shares and pay through either land or FSI sale,” said Amit Goenka, national director, capital transactions, Knight Frank India, a property consultant.
Floor space index, or FSI, refers to construction rights on a given plot of land. A higher FSI roughly translates into additional floors.
Apart from JPMorgan, BPTP has also received investments from Citi Property Investors, known as Apollo Global Management Llc now, which invested Rs322.5 crore at the entity level in 2007 and then Rs399 crore in its projects.
“Citigroup has already chosen some projects under the swap option of our contract with them. Both parties are currently formalizing processes in this regard,” said the BPTP spokesman.
Though BPTP didn’t elaborate on the swap option, analysts said that it means the investor could exchange its entity level shares for a stake in its projects.
“It could mean PE money to ownership of asset or converting PE money to more high-cost debt,” said the second person mentioned above. An email sent to Apollo Global didn’t elicit a response.
BPTP said that on the project front, it is in talks with a number of lenders or institutions for raising funds.