New Delhi: Reports that DLF Ltd, India’s largest real estate firm by market value, could acquire DLF Assets Ltd, a company owned by the Singh family that promoted DLF, have not gone down well with analysts.
DLF Assets buys and holds completed commercial real estate projects of DLF. It remains largely owned by the Singh family. Since its founding a little over two years ago, it has received a funding of $1.15 billion (Rs5,784 crore) in total from Symphony Capital ($450 million), DE Shaw and Co. Lp. ($400 million) and Lehman Brothers ($200 million).
Symphony, however, is promoted by the Singhs, and in November last year, it acquired Lehman’s stake in DLF Assets.
According to an analyst with an international brokerage, DLF is looking to swap shares in itself for DE Shaw’s stake in DLF Assets. DLF declined comment for the story.
“DE Shaw has less than 20% stake in DLF Assets and Symphony Capital is funded by the promoters of DLF...so acquiring DE Shaw’s stake basically means that the company would acquire 100% stake in DLF Assets,” said the same analyst with an international brokerage, who didn’t want to be identified.
“This will not be good for DLF... If the promoter comes into DLF Assets, the swap ratio will be skewed towards DE Shaw,” added this analyst.
That’s because the value of assets held by DLF Assets has dipped sharply, according to analysts. A deal to buy DE Shaw out of DLF Assets, they add, will not benefit DLF’s minority public shareholders, who own around 0.5% in the company.
“We believe such a move in current environment will be detrimental to DLF shareholders,” wrote Sandeep Mathew, an analyst with BNP Paribas in a report dated 23 March. The brokerage firm has maintained its “reduce” (or sell) rating on DLF’s stock.
In the current market environment, publicly traded Reit-like structures are at best valued based on income-generating potential of assets (much like the Ascendas India Trust is) rather than development potential, the report said.
Reit stands for real estate investment trust, a preferred and tax-efficient vehicle for investing in and trading in real estate.
“If we value DLF Assets in a similar manner, it currently has a negative net worth,” Mathew added. “DLF can generate more valuation upside acquiring Reit structures trading at deep discounts such as Ascendas India Trust (45% discount to NAV, or net asset value) or Unitech Corporate Parks (92% discount to NAV).”
The fairness of any transaction involving DLF and DLF Assets will likely be judged depending on how the loss is shared among the promoters, according to a report by Credit Suisse dated 24 March.
“If the entire loss is borne by the promoters, it will be positive for DLF and, on the other hand, if any loss is passed on to DLF, it could be viewed negatively by DLF’s minority shareholders,” Anand Agarwal, an analyst with Credit Suisse wrote in the report. The firm has maintained its “underperform” rating on the stock.
“We prefer DLF taking over DLF Assets entirely, as it would solve the issue once and for all,” Agarwal wrote. “However, we note that for any resolution to be neutral for DLF’s shareholders, the promoters will have to bear loss in their personal capacity.”
Analysts also said that if DLF buys the entire stake in DLF Assets, it would affect the company’s own financials. During the third quarter ended December 2008, DLF Assets’ contribution to DLF’s profit before tax was 35% of DLF’s gross profit.
Shares of DLF closed at Rs166.30 each on the Bombay Stock Exchange, down 0.66% on Tuesday, a day when its benchmark index rose 0.5% and the BSE Realty Index, an index of 14 realty stocks, climbed 0.84%. DLF’s shares are 77.49% off their 52-week high and 69.76% lower than the price at which they were sold to the public in early 2007.