DLF at it Again

This cashless deal (worth Rs10,000 crore) is another case where a family-owned unit has been valued at a fancy price and dumped on a publicly-listed entity. But neither the regulator nor the investor community seem to care

According to media reports, DLF is planning to acquire DLF Asset (DAL) through its wholly-owned subsidiary DLF Cyber City, which will buy Caraf, an investment firm owned by KP Singh and family which owns DAL. The deal is valued at Rs10,000 crore, which according to the company will consolidate all its commercial assets under DLF Cyber City.

DLF Cyber City will issue fresh shares to the promoter family. Post this cashless acquisition, the promoter will own around 38% stake in DLF Cyber City and DLF’s stake will be reduced to 62% from 100% currently. DLF is set to list DAL on the Singapore Stock Exchange before March 2010. KP Singh and family are believed to have bought the shares through a hedge fund owned by DE Shaw for $500 million (around Rs 2,325 crore) in DAL last week. DAL has Rs7,300 crore in debts while the equity value is pegged at Rs2,500 crore.

Clearly, the promoters of DLF are at it again. The media report is self-explanatory.  The questions are:
1. If DE Shaw paid $400 million in 2006, why has the family bought back the same assets at $500 million in 2009? Surely, the real-estate markets have crashed considerably in the following three years and if anything, the stake could have been bought back at half the price, if not lower? And if this is going to be the benchmark for valuing the family-owned company (DAL) that is going to be merged into DLF, surely it is a scam.

2. An ‘independent’ committee has been appointed to look into this so called re-structuring whereby another family-owned unit gets valued at a fancy price and gets dumped on a publicly-listed company. Will the committee ask the above question and more important, find out how many more such family owned ‘jewels’ are around which operate in the same sphere and will get dumped on the listed entities?

When DLF came for the IPO, it had several ‘synergistic’ businesses like hotels, commercial complexes on rent, cinemas etc. which determined its high valuation. Now the strategy for dumping some of them (which were synergistic) is to apparently get out of ‘unrelated’ businesses. How does something synergistic yesterday become unrelated today is for the ‘independent’ directors to mull over.

It is common knowledge that many promoters have umpteen companies that are used to siphon off money from listed vehicles. Instances like the one in the newspaper report above are sufficient grounds for any investor to dump the shares. How can one expect any fairness, so called ‘independent committees’ notwithstanding? Surely even Satyam had ‘independent’ committees. It is high time that every promoter makes a separate declaration about family owned/controlled entities which are going to get dumped on the listed vehicle.

The sad part is that investors (institutional or rational ones) are not bothered about any of this. For them, governance does not matter one bit. Regulators are more worried about form-filling compliance and unless there is a public hue and cry, they do not have the competence or willingness to go beyond ‘legal’ compliance.

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