Cos resort to distress sales of non-core assets

On the face of it, there may not be much similarity between the Suzlon Group, GMR Group, Lanco and real estate major DLF. However, a closer look would reveal that all of them are sitting on huge piles of debt and looking to sell stakes in either what they call non-core assets or rope in a strategic partner to reduce it. Several of them are struggling to find buyers and even in some odd cases like that of DLF, which was able to sell a land parcel in Mumbai recently the returns have not been attractive.

Similar is the case with DS Constructions, which was the concessionaire for the Delhi-Gurgaon Super Connectivity toll plaza but had to sell a 74% stake to prime lender IDFC at R1, which also took on the firm's R1,600-crore debt.

That valuations are not high and promoters are resorting to what can be termed distress sales is evident from the fact that while calendar year 2012 saw 374 inbound and domestic deals, higher than the 357 deals struck in 2011, the value of deals in 2012 fell sharply to $13 billion from $33 billion in 2011.

Take the case of GMR, which is present in airport development, power and roads. The group started selling non-core businesses in 2010 when it offloaded its stake in sugar company EID Parry for R110 crore. Today, with a total debt of nearly R37,000 crore, it is seeking to raise over R4,000 crore by selling five highway projects and also reduce stakes in some group companies, but is struggling to find buyers. The Hyderabad-based infrastructure company did, however, manage to sell its expressway project between Farukhnagar-Jadcheria to Macquarie SBI Infrastructure Investments for R206 crore on Wednesday after initially investing R146 crore in the project.

Real estate major DLF is also struggling under a massive debt burden of around Rs 21,200 crore and has sealed several deals recently in its attempt to trims its debt. But a closer look reveals a hint of desperation in sealing these deals.

In November 2012, the Delhi-based company sold a plot of land in Mumbai to its competitor Lodha Developers for R2,725 crore. On the face of it, DLF seemed to have got a good deal, having bought the land for R702 crore in 2005. But out of the money Lodha paid, R1,500 crore was to take on the debt of the project. In essence, DLF got only R1,225 crore as cash, not even double the amount it had invested initially.

In December, DLF also managed to sell off Aman Resorts, a luxury hospitality chain, for R1,641 crore, but the sale was to the chain's founder Adrian Zecha after trying for long but failing to find another buyer.

Similarly, real estate company Unitech first announced plans to sell non-core interests including SEZs and IT parks in 2011 but with no takers so far, it has only been able to mop up money through sale of some land pockets.

The situation at Suzlon Group and Lanco is similar to a certain extent. While Suzlon is more or less forced to divest non-core assets as part of its corporate debt restructuring scheme, Lanco has announced plans to sell two road projects and reduce holdings in hydro and thermal power projects as it seeks to reduce its R32,000-crore debt before the situation becomes critical.

Delays in finding a buyer for a partial stake sale in its holding company for power projects and raise R4,150 crore has forced Lanco to look at selling stakes separately in three power projects in Udupi, Amarkantak and Babandh for R2,500 crore.

"This indicates that deal activity was driven by sellers desperate for cash who sold off without waiting too long for an improvement in valuations and market conditions," said a transaction consultant with a global audit and consultancy firm.

Calendar 2012 saw a slew of asset sales by promoters with a heavy debt burdens, but lack of buyers meant that such deals were often rushed. "In the game-changing deals of the year, the key strategy of sellers was to focus more on core businesses and reduce debt," said investment advisory and consultancy firm Grant Thornton in its Annual Deal Tracker report for 2012. "Several multi-million dollar deals were struck in primarily to reduce the debt burden such as Diageo-USL deal, Aditya Birla-Pantaloon deal."

The Future Group sold its Pantaloon retail format to Aditya Birla Nuvo for $160 million months before foreign direct investment in multi-brand retail was allowed. After the Pantaloon deal, the group also sold its financial services company Future Capital Holdings to private equity firm Warburg Pincus for $84 million.

Garnering interest amongst global buyers also remains a concern. "Though a declining Indian rupee would have ideally resulted in cheaper Indian targets for foreign acquirers, moderation of Indian growth rates and policy uncertainties have kept interest from foreign buyers at bay," said the Grant Thornton report.

"Global buyers are very wary of purchasing assets in India right now given the political uncertainty," said a London-based investment consultant. "Although assets of distressed promoters may be available at a good value, there is a continuous risk of how government policies will pan out and whether these assets will turn out to be cash burners for the buyer."

Interest from buyers may revive during the calendar 2013 due to a resurgence in the stock markets.

"Generally it is seen that buoyant stock markets tend to stimulate M&A activity," said Vinod Wadhwani, director at Ambit Corporate Finance. "Higher market capitalisation of their flagship businesses does encourage CEOs and promoters to initiate M&A activity and this also sometimes results in some wrong decisions."

"As far as non-core assets M&A activity is concerned, they will continue to happen as the sellers of non-core assets who are strapped for cash will take the decision to sell irrespective of the state of the equity markets," Wadhwani added.

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