DLF - DAL Merger and Swap - Complete Analysis

[sunil]

DLF's board approved the integration of DAL (DLF Assets) with DLF via its fully owned subsidiary DLF Cyber City. Post the merger, DLF will own 60% of the
merged entity (DLF Cyber City + DAL), while remaining 40% in DLF cyber-city will be held by the promoters in lieu of their stake in DAL.

There is limited information on the assumptions for valuations and total land assets under Cybercity developers. However, assuming an equity value of Rs 47B for DAL (based on our DCF valuation), the swap ratio then values Cyber city developers at Rs 70B. The leased portfolio of DLF cyber city is worth Rs 67B (based on Rs 60psf average rent for office and Rs 200 psf for retail). This will leave additional Rs 3B to be attributable to land assets and liabilities.

Just purely going by above logic, the transaction looks reasonable to shareholders of DLF.

The deal now consolidates all the rental assets under one company and eliminates future DAL sales and related party transaction issues. It also aligns the interest in rental assets of DLF with promoters.

[sunil]

Given that the proposed transaction would involve promoter entity, management will have to address the following investor issues: 1) basis for the valuation of leased assets and assets under development will have to be undisputedly established, 2) clarity on the quantum and valuation of the land held for
development by DLF Cyber City developers, and 3) future strategy for monetising the investment in leased assets and reducing debt.

[chetan]

BOFA Merrill Lynch said,

We believe that concerns raised by the media,regarding a transfer of value from the listed company to promoters, are over-done. Our calculations suggest no such obvious transfer of value. DLF’s high exposure to the NCR (National Capital Region) and commercial real estate are positives in our view. In addition, concerns on DAL post this deal will recede and valuations support our core thesis. We therefore maintain our estimates and reiterate our Buy rating with PO of Rs450, offering 23% upside.

Citi said,

While we await more details on how the integration pans out, our initial analysis suggests: 1) Over the medium-long term, as leasing market improves and commercial markets revive, this integration will prove value accretive, yielding a healthy and stable rental income/cash flow; 2) Though it’s a 'cashless' deal, it could increase short-term leverage on DLF's B/S (vs. current 0.54x) as it takes on Caraf's (incl. DAL’s) proportionate debt exposure (a portion of which is self-funded through lease rental discounting); 3) This should further aid the potential REIT listing of DAL, which has been on cards for a while, with DLF now as the preferred sponsor; and 4) The integrated entity will continue holding and managing leased assets from DLF and monetize them when appropriate.

[chetan]

Morgan Stanley is Unhappy with the Deal,

Overall corporate structure gets complex (e.g., DLF promoter holdings at two levels, listed company and DCCDL), future liability of SC Asia (60%) shifts to DLF, in practice DAL remains unfinished agenda (DLF will transfer 7 msf of pending assets over next few years, DAL will need to pay off pending receivables), transfer of lucrative assets (NTC and Mall of India) to partly owned company and adverse valuation ratio (as per our understanding).