Phoenix Mills bets the farm with QIP

The Indian textile mill-turned-mall operator raises $246 million for acquisition financing, pricing its deal at the top end of the range.
In a bold move, Phoenix Mills has raised an amount equivalent to almost 40% of its market capitalisation by issuing $246 million of new shares in a Qualified Institutional Placement (QIP), with the proceeds going to fund an acquisition. The target is unlisted Atlas Hospitality, a hotel operator with projects in Mumbai, Chennai, Pune and Agra.

The acquisition follows a merger of Phoenix Mills with Ashok Ruia Enterprises, approved in March this year, but not yet finalised.

Following Wednesday's deal, the companyÆs family shareholder saw its stake drop from 74.8% with a freefloat of 25.2%, to 50.3% with a freefloat of 49.7%.

The deal will help take the company a step further from its previous status as a textile mill with a history dating back to the 1880s, to a modern retail and real estate player.

The company relies on one mall, High Street Phoenix in Mumbai, for over 90% of its income û so diversifying through M&A makes sense. High Street Phoenix is one of MumbaiÆs most modern malls. When phases two and three are finished, it will feature a seven-screen multiplex cinema, hotel, carpark, fashion retailers and office space. The hotel will be run by the Shangri-La group.

The QIP proceeds will be used for the acquisition of three million shares in Atlas Hospitality, other real estate projects, and working capital. The acquisition cost for Atlas is reportedly some $87 million for three million shares, representing a stake of 75% in the target company.

If the acquisition goes though, the familyÆs stake in the combined entity will amount to 65.5%.

A QIP is a mechanism set up one year ago by the Indian regulators which permits a company to seek investment from both foreign and domestic investors, but with the number of accounts not exceeding 49. Given the closed nature of IndiaÆs capital markets, this is an important channel for listed companies in India to raise funds internationally.

Investors who bought into this deal were predominantly based in Hong Kong and Singapore and were happy to exploit both the plays Phoenix Mills offers: Indian real estate and retail. ôIt reflects well on the company that this kind of deal can go through, despite the turmoil in the markets recently,ö says one source. The deal was reportedly upsized from $200 million.

Equity was chosen because a debt issue, given the size of the deal to the companyÆs market cap (roughly $680 million), would have been æa bit ambitiousÆ.

Indeed, the company made a profit of just $9 million (after tax) in the financial year to March 31, 2007. However, investments have been heavy in the period.

As is usually the case in private placements, the roadshow was little more than a formality, and lasted just two days. The deal priced on Wednesday morning at Rs2,000 ($47.6), the top end of the Rs1,900-Rs2,000 range. The securities regulator pricing guidelines set a floor of Rs1,588. The final price of Rs2,000 represents a 1.3% discount to the share price when the deal was done Wednesday morning.

Phoenix MillsÆ stock price has gained 63% year-to-date but finished Wednesday down 1.2% at Rs2,002. The Sensex index crashed 615 points, almost 4%, to 14,935.

Joint global coordinators and bookrunners were JM Financial (in association with Morgan Stanley India), IL&FS Investsmart, Collins Stewart Inga and Edelweiss Capital.
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