MUMBAI: Private equity group Blackstone; a consortium of sovereign funds of Abu Dhabi, Qatar together with Kotak Realty Fund; and GIC of Singapore are the final three shortlisted candidates in race to pick up the entire 40% stake held by DLF promoters in the office rental arm -DLF Cyber City Developers Limited (DCCDL).
The three have submitted nonbinding offers estimated between $1 billion and 1.1 billion for the stake, pegging DCCDL’s equity valuation (excluding debt) at about $2.5 billion, said multiple sources. directly familiar with the developments. They have also initiated a detailed due diligence exercise.
Last October, DLF had said that its promoters led by KP Singh and family would sell their 40% stake in the company’s rental arm and that the promoters would reinvest a substantial portion of the sum raised through the transaction back into DLF after paying tax and other charges. DCCDL owns leased commercial assets, including office and retail space portfolio in the National Capital Region and in Kolkata. The bids are essentially for a portfolio of around 26 million sq ft of tenanted space, mostly office buildings and excludes some of its retail assets, like the Mall of India in Noida and DLF Place in Saket, and the office buildings that house DLF corporate headquarters. DLF owns 60% of DCCDL. The arm has a debt of Rs.11,000-12,000 crore. Its total portfolio is a little over 30 million sq ft of leased commercial and retail space which generates annual rental income of about Rs. 2,278 crore for the company, as per the company’s analyst presentation dated May 2016.
DLF had a consolidated gross debt of Rs. 25,623 crore as of March 31, 2016. Net debt, after adjusting cash in hand of Rs. 3,421 crore, was Rs. 22,202 crore and this included Rs.12,325 crore of DCCDL’s dues. The residual debt on DLF’s books would be about Rs. 10,000 crore.
Investment banks Morgan Stanley and JP Morgan are advising DLF in the sale.
“DLF’s strategy to restructure the ownership of its rental asset-holding subsidiary DCCDL could potentially create multiple triggers. The move should lead to equity capital infusion of Rs.9,000-10,000 crores aid in delevering, and improvement in governance standards by aligning promoters’ interest with minority,” Motilal Oswal Securities said in a note on June 30.
“DLF is best-positioned to benefit from its strong micro markets and rental re-pricing due to its superior and largest leased assets among its peers. We estimate a 14-15% rental income CAGR over FY16-19,” it said.
India’s office leasing market is witnessing a strong growth -leasing volume up by 10% YoY in CY15, with vacancy rates at a seven-year low and rentals firming up amidst limited supply. There are still no signs of leasing volume peaking out on account of moderation in hiring in the ITITES sector, though analysts expect the strength in the rental market to remain high, driven by lack of supply and low vacancy rates in the system. This explains why a prized portfolio like DLF’s had earlier seen keen interest from a diverse set.
Credits ET Realty