DLF shareholders?

Parent company absorbing its own cash-strapped sibling company seems to be order of the day.
DLF plans to buyback its promoter owned subsidiary DLF Assets Ltd (DAL).

A few points worth understanding are ...

• DAL houses lease rentals of four SEZ projects sold to it by DLF.
• DLF’s more than 50% revenues are accounted for by DAL (This has always remained under the analysts’ scanner as it boosts sales, but also adds up the receivables in DLF’s books.)
• The main purpose behind this move seems to be the repayment of the $400 million stake acquired by private equity player D E Shaw in 2007.
• With the primary market option dried up, the promised route of exit to D E Shaw does not exist any more as the tenure of their investment comes to an end.
• The Option for the DAL to mortgage the lease rentals of these SEZs and raise funds close to around Rs 2,000 crore from banks and financial institutions seems to be a difficult proposition as rentals for commercial and retail building are falling.

Implications:

• The market assumes that DLF would acquire DAL at its fair book value and the promoters would be bearing the losses of DAL.
• That the receivables in DLF’s books and inventory in DAL’s books will have to be reversed.
• The earnings visibility of DLF would also come down. In fact, DLF would not be able to enjoy the tax benefits that accrue to an SEZ developer (DAL in this case).