Embassy Group Opts For Merger Route To List On The Exchanges
Small investors in Indiabulls Real Estate should stay put to gain value, Embassy Group Chairman Jitendra Virwani says.
The Blackstone Group Inc.-backed Embassy Group is taking control of Indiabulls Real Estate Ltd. through a process overseen by the National Company Law Tribunal.
On Tuesday, the Mumbai-based real estate company approved the merger of two Embassy Group units with itself. That makes Jitendra Virwani’s Embassy Group the largest shareholder in the combined entity, which will hold a little more than 44.9% stake. The stake held by its existing promoters, including Sameer Gehlaut, will fall to less than 10%. Gehlaut will continue in the company in a non-executive position.
“We haven’t put any restrictions on Gehlaut over selling his stake," Virwani, chairman and managing director of the Bengaluru-based commercial estate developer, told BloombergQuint in an interaction on Wednesday.
The Embassy Group had in June 2019 purchased nearly 14% stake in Indiabulls Real Estate from Gehlaut at Rs 151 per share. Gehlaut at that time was looking to secure approval from the Reserve Bank of India for the merger of his group’s NBFC arm—Indiabulls Housing Finance Ltd. with Lakshmi Vilas Bank Ltd., which didn’t come through.
It was then widely anticipated that the Embassy Group will acquire the remaining stake in Indiabulls Real Estate from Gehlaut and make an open offer to its minority shareholders. But it chose the merger route to conserve cash and take ownership control of the company and allow Embassy Group to list itself on the exchanges without going through the process of an initial public offering. That would have been a challenge for a real estate developer under the present economic circumstances. We believe this was the right time for a merger, Virwani said.
A merger, he said, is the best option as it diversifies the portfolio of the company and helps monetise inventory to release cash flows.
Small investors should stay put to gain value, said Virwani. “They would get much better returns than an open offer,” he said, adding that an open offer for Indiabulls Real Estate would have restricted the company to look at the last six months’ price which would have come to Rs 47-56.
As part of the merger, which would take about 8-10 months for completion, Indiabulls will issue shares to Embassy Group and its investors—Blackstone and others—against the Embassy assets that will be merged with Indiabulls Real Estate. It will also issue shares to investors in its projects, Sky and Sky Forest. The merged entity would be called Embassy Developments Ltd.
The deal values assets of NAM Estate comprising Embassy Group and its investor at Rs 5,050 crore. The stake held by investors in Indiabulls assets—Sky and Sky Forest—is valued at Rs 808 crore. Indiabulls Real Estate share is valued at Rs 92.5 per share—a premium of around 25% to its current market price, giving it a valuation of Rs 4,206 crore.
The merger brings together the residential market-focused Indiabulls Real Estate and commercial real estate developer Embassy Group, resulting in a better product mix. The merged entity will have 53% exposure to commercial real estate and 47% exposure to residential real estate, the company said in its investor presentation.
Virwani expects the residential market to rebound “in a big way” in the next three years.
“It’s not that there’s a slowdown in residential (market) or residential is a bad area to be in. Prestige Estates Ltd. and Godrej Properties Ltd. are fairly doing well,” he said. “In the residential area, developers who build, perform. You need more depth of equity from the promoter side and less of debt so the leveraging has to be less,” Virwani said. “Our immediate objective is to continue all residential (projects).”
The idea is to build this into a large real estate company in India, he said, with the focus on generating cash and liquidity to grow the company.
The merger allows Embassy Group, the new promoter of Indiabulls Real Estate, to enter the Mumbai and Delhi-NCR markets. “We were more Bengaluru-centric and this deal gives us better opportunities even in commercial projects, while Indiabulls has residential projects.”
The merged entity will look to mix synergies of both the companies, he said. We’ll also seed it into our REIT (real estate investment trust) and make it stronger, benefiting both the companies, said Virwani, adding that its institutional partner (Blackstone Group) is also coming along in the merger.
The combined entity will have over 80.8 million sqft of saleable and leasable space. “Rather than going and looking at something else, we would rather expand in the opportunities in the land bank we have.”
The combined entity will have a land bank of 3,353 acres, making it the largest real estate company in terms of land bank. It will be the second-largest player in terms of residential stock after Godrej Properties with 38 million sq.ft. in residential stock and planned area.
At a time when Covid-19 pandemic has depressed the market and financials of real estate companies, Virwani said the time is right for the merger. “Our debt would be close to Rs 4,000 crore and net debt on the book is 0.6 times, and by us investing Rs 250 crore allows the company to have a completed residential inventory of Rs 10,868 crore,” he said.