The markets have always been uncomfortable about DLF Ltd’s related party transactions with promoter-owned entity, DLF Assets Ltd (DAL). DAL purchased properties developed by DLF, propping up the latter’s revenues, but delayed payments, resulting in huge receivables for the real estate developer. DAL’s attempts to raise funds through private equity investors have not fructified either, causing it to consider selling out to DLF.
Based on DLF’s share price movement in the past few trading sessions, this news hasn’t got the markets worried. The DLF stock has hovered around Rs170 in the past week. The assumption seems to be that DAL’s losses (it had purchased property when real estate prices were much higher) would be borne by its promoters, rather than by DLF. While this is a fair assumption, it still remains to be seen at what price DAL will be valued for any stake sale or merger. If it’s valued higher than the worth of its assets, DLF investors could end up taking a hit.
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As it is, DAL has to fulfil the obligation of returning the original investment of one of its major investors, DE Shaw and Co. Lp. This is because DE Shaw’s $400 million (Rs2,020 crore) investment has a capital protection clause. According to news reports, the company has planned to securitize lease rentals on DAL’s books to raise funds for the DE Shaw buyback.
According to analysts at IIFL Capital, this will considerably increase the debt burden of the DLF consolidated entity (DLF+DAL), after the acquisition.
The good thing about the acquisition is that the overhang of related-party transactions with DAL will disappear and the company’s valuations can be expected to improve at a faster pace when the tide turns in the realty sector. Of course, this is provided the acquisition process is smooth and doesn’t go against DLF’s minority shareholders.
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Graphics by Sandeep Bhatnagar / Mint