DLF to buy SEZ arm

DLF Ltd, the country’s largest listed realty company, will acquire DLF Asset Ltd (DAL), the real estate investment trust owned by promoters K P Singh and his family, for an enterprise value (equity plus debt) of around Rs 7,000 crore.

The move is aimed at repaying some of DAL’s debt and to bring commercial properties under the flagship company to generate an annual income of around Rs 600 crore in the form of lease rentals from 2009-10. DAL currently earns around Rs 325 crore from lease rentals.

DAL had acquired four Special Economic Zones (SEZs) from DLF Ltd with a built-up area of 4.5 million square ft, which will increase to 9.5 million sq ft by the end of this month and to 19 million sq ft when fully ready.

Under the proposed deal, DLF will raise debt of around Rs 2,500 crore from banks and financial institution by mortgaging receivables from the lease rental of these SEZs, mainly to repay leading hedge fund DE Shaw, which had invested $400 million in 2007, sources said.

In addition, around $700 million invested by Symphony Capital and some debt from other lenders will be transferred to DLF Ltd’s books.

DAL had raised $1.1 billion from DE Shaw and Symphony Capital through optionally convertible preference shares with a coupon rate of 4 to 6 per cent.

Sources said D E Shaw was assured an exit route from DAL after it a planned listing on the stock exchange in two years. That route has closed since the real estate market has crashed and is unlikely to witness a revival of interest from equity investors in the near future. As a result, the group has abandoned the idea of listing DAL, sources close to the development said.

“In the absence of an exit route, the hedge funds decided not to convert the preference shares into equity shares and asked for redemption,” the investment banker added.

“Since the maturity period of DE Shaw’s investment is coming closer, DAL has left little option to but to them back,” he added.

Symphony Capital’s investment will mature in 2012.

Asked about the deal, Ramesh Sanka, group chief financial officer, declined to comment saying the company was in its “silent period” owing to the year-end.

An investment banking official, however, said they are working on a couple of options including buying out the entire assets of DAL. “Depending upon the tax implication, the actual structuring will be decided. Our target is to complete the transaction by the end of March but it will probably be completed in the first fortnight of April,” he added.

The group has appointed Citibank, Ernst & Young and Grant Thornton India as advisors to the transaction. 

The consideration for DAL’s equity value alone is expected to be very small since the value of the assets it acquired from DLF Ltd in the last couple of years has depreciated sharply. “It is token money of less than Rs 100 crore or $20 million,” sources said.