DLF –Buy- Anand Rathi
The DLF Board has approved the merger/amalgamation of Caraf Builders and Constructions (a promoter group company, with a 96% economic interest in DLF Assets) with DLF Cyber City Developers. With this, leased assets of 9.7m sq ft and debt of Rs5,190 crore come to DLF. We believe thisdecreases our NAV and hence target price from Rs445 to Rs436.
The merger. The approval is for Caraf to merge/amalgamate with DCCDL, after which DLF will hold 60% in the merged entity; the rest would go to the DLF promoters. With little deviation, we believe the swap ratio is fair.
The implications. Although the merger/amalgamation does not involve any cash, Rs2,460 crore of Caraf’s debt would be shown on DLF’s balance sheet. Also, if DLF exercises the call option, as the sponsor/owner of DAL, it is liable to pay to SC Asia the fair market value of Rs27.2bn of compulsory convertible preference shares on conversion.
The area and rental assumptions for the properties initially valued under DLF and now valued for the merger are roughly the same. Awaiting more clarity from the company, we settle on a 2% decrease in our NAV of Rs445. Our new target price for DLF is Rs436, which is on par with its NAV.
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