Founders trim DLF stake, but reinvest proceeds

The founders of Indian property developer DLF Limited late Tuesday sold a 9.9% stake in the company through a placement, raising Rs38.64 billion ($783 million). However, this wasn't a simple case of the majority owners trying to secure a profit, or taking some of their investments of the table. Rather, they will reinvest part of the money into DLF through a wholly-owned venture and use the rest to buy the convertible preference shares held by a third party in that same venture.

The reuse of the proceeds likely explains why the market's reaction to the placement was initially positive, with the share price up as much as 7.9% in early trading. However, negative sentiment outside India eventually took its toll, both on the broader market and on DLF, and the stock closed 1.6% lower at Rs232.50. However, compared with the nosedives that tend to follow sell-downs by substantial shareholders, this was not a bad performance.

Another positive for the minority shareholders is the fact that the deal will double DLF's free-float to 21.3% from 11.4%, which the company said will in due course result in a corresponding increase in its weighting in various indices.

Investment funds controlled by vice-chairman Rajiv Singh and his family, which before the transaction held 88.5% of DLF, offered 168 million shares at a price between Rs223 and Rs230, which translated into a discount of 2.6% to 5.6% versus Tuesday's close of Rs236.25. Although this was a tight discount range for a trade of this size, strong demand from high-quality global funds allowed the deal to price at the top end for a discount of only 2.6%. Deutsche Bank and J.P. Morgan acted as joint bookrunners.

Sources say the order book included some key anchor orders that were prioritised in terms of allocations and it is likely that some of those would have made at least loose commitments before the launch to give the bookrunners the confidence to go out with that tight a range. In an interview with India's CNBC-TV18, which was recapped by Bloomberg, Singh said the buyers included Capital International, HSBC and Fidelity. According to a company statement filed with the Mumbai stock exchange, there was also significant demand from most of its large existing institutional investors

All-in-all, the deal attracted more than 50 investors from across the globe.

The transaction is arguably large in dollar terms. It is more than double the size of the next biggest Indian equity deal this year, Unitech's $325 million qualified institutional placement, and according to a banker, the second largest sell-down in India ever. It is also the second largest equity transaction in the Indian property sector after DLF's own initial public offering in June 2007, which raised $2.25 billion. However, DLF is a liquid stock and in terms of trading volume the deal accounted for no more than 6-7 days worth of stock, which would have helped to keep the discount low.

The sellers told investors that they would use about $400 million to $500 million of the net proceeds to buy the convertible preference shares held by D.E. Shaw, a global investment and technology development firm, in its 100% owned unit, DLF Assets Private Limited (DAL). DAL is a vehicle set up to hold some of DLF's real estate developments, primarily its IT parks, with the intention of listing it in its own right as a real estate investment trust or a Reit-like business trust. There has been speculation that DLF may merge with DLA and the buyout of D.E. Shaw's preference shares would facilitate such a move. In the earlier mentioned statement, DLF noted that the transaction should also put investor concerns regarding DLA liquidity to rest and reduce DLF's net balance sheet expose to DAL.

The rest of the money will be "infused" into DAL and used to settle receivables that are due to DLF. Thus this money will find its way back into the listed company. The Singh family's stake in DLF will be reduced to 78.6% after the deal.