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Indiabulls Real Estate Ltd and Embassy Group Scheme of Amalgamation

Special Situation: Indiabulls Real Estate Ltd and Embassy Group Scheme of Amalgamation

In August 2020, Bangalore based Embassy Group entered into a definitive agreement to merge its certain residential and commercial projects with Indiabulls Real Estate Ltd (IBREL) through a cashless scheme of amalgamation. Embassy Group will become the promoters of the merged entity. The merged entity to be known as Embassy Developments Ltd and to be co-headquartered in Mumbai and Bangalore.

As of today the scheme has received necessary approvals from CCI, SEBI and the stock exchanges and both parties will next approach NCLT for their approval and sanction of the proposed merger. The process is expected to complete by the end of this year.

Snapshot:

Growth Potential:

The combined entity will have 80.8 million square feet of launched and planned development potential. The merged entity will have about 30 projects spread across Tier I and Tier II cities in India.

Market Leadership:

The merger will create one of India’s largest real estate development platforms.

Geographic Footprint:

Complementary Pan India Presence across Key Markets helps both companies to reduce dependence on any one region of India.

Diversified Portfolio:

Balanced mix of Residential and Commercial Development Portfolio to provide a natural hedge against cyclicality.

About Indiabulls Real Estate:

Indiabulls Real Estate Ltd, is a large publicly listed real estate company, with a well-diversified presence in residential real estate development across the price spectrum, from mid-income to premium to the super luxury space. Geographically, the company’s strategic focus is in key markets of Mumbai Metropolitan Region and the National Capital Region. Incorporated in 2006, the Company has, through its SPVs/subsidiaries, delivered 24+ million square feet of commercial & residential projects, including the iconic Indiabulls Blu Estate & Club residential towers in Worli, and commercial assets known as One Indiabulls Centre and Indiabulls Finance Centre in Lower Parel.

About Embassy Group:

Founded in 1993, Bangalore based Embassy Group is one India’s largest real estate conglomerates with a broad portfolio of over 61 million square feet of prime commercial, residential and industrial space in India. Embassy is a sponsor of India’s first REIT, Embassy Office Parks, the largest office REIT in the Asia Pacific in terms of square feet.

Merger Deal:

As part of the merger Embassy Group will transfer certain identified residential and commercial assets into NAM Estates Pvt Ltd (‘NAM Estates’). Shares of IBREL will be issued to shareholders of NAM Estates and existing shareholders of Sky / Sky Forest residential assets (‘NAM Opco’).

Few Institutional investors including Blackstone Group (BREP) will also be part of the proposed merger.

Swap Ratio:

IBREL is valued at Rs 92.50 per share for the cashless merger wherein IBREL will issue equity shares to the Embassy group entities as listed below:

  • NAM Estates Merger into IBREL – 6,619 shares of IBREL for every 10,000 shares in NAM Estates.
  • Sky Assets Merger into IBREL – 5,406 shares of IBREL for every 10,000 shares in NAM Opco.

Change in ownership:

Post-merger, Mr. Jitendra Virwani, Chairman of Embassy Group, and certain other promoter entities of NAM Estate will be classified as the new promoter of the listed entity and existing IBREL promoters will declassify themselves as Promoters.

Investment rationale:

Due to its poor/average fundamentals combined with alleged corp governance issues and prolonged down cycle in real estate industry, the IBREL stock price has been in doldrums for a very long time. Now since the ownership is going to be changed and the Embassy group along with the PE firms like Blackstone are at the helm, stock markets may perceive this as a positive development resulting in higher valuation. There are early signs of real estate market showing resilience and the real estate cycle turning positive. The merger will provide visibility on near term liquidity and cash flows. Their newly attained pan India presence, leadership position and diversified portfolio should provide ample opportunities for growth in the long term.

IBREL was trading at below book value and 2x sales until recently. Some of its peers like Godrej Properties, DLF are trading at more than 2x book and 10x sales. Stock has run up a bit in the last few days along with the broader market rally but in my view stock specific re-rating is yet to happen and could give a decent upside from current levels.

Negatives/Risks:

The real-estate cycle may not recover. Covid related uncertainty may continue longer than expected.

The flexi workspace and work from home trend may lead to demand slump in office space.

Synergy risk. Since the two companies operate in different region and asset class, integration may not be smooth and easy.

NCLT approval is expected by Q3FY22. Any delay or legal hurdles may affect the deal.

Though better than IB in terms of brand image, Embassy group too has few black spots and fraud allegations.

No open offer to existing shareholders of IBREL resulting in muted gains for minority shareholders whereas Embassy will become publicly listed entity through the merger without going for IPO.

Disclosure:

Not a SEBI registered advisor. Views are personal, not a buy/sell recommendation. Invested and biased.

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hi, do you know the details of the land that embassy is merging into the amalgamated company? i looked but couldn’t find any details.

it seems to me that ibrel promoter seeking an exit. i believe he sold a fair bit of his holdings in ibrel in march. therefore not sure he would still hold little less than 10pc(as the presentation implied).i suspect it would be more likely 7pc post amalgamation (i think). may be there are some personal financial compulsions… but as things stand doesnt seem like he is going to stick around to find out.

anyways its hard to value this without knowing what exactly embassy is putting in terms of land.

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The valuation report for scheme of amalgamation mentions only about the land value of IBREL hence you can assume that the Embassy group entities do not own land bank. This may be because they mostly operate based on the Joint Development Agreement (JDA) with landowners instead of owning the land. I may be wrong here as there is not much information available in public domain about the Embassy group entities. The report is available on IBREL website - it is too big to attach here.

IBREL owns 3353 acres of land bank as mentioned in one of the investor presentations.

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Regarding the promoter selling, it all began when Indiabulls Housing Finance Ltd. decided to seek banking licence by acquiring Laxmi Vilas Bank (LVB) back in 2019. There were concerns that the promoters of IBHFL were connected with the real estate business, which was not in sync with the norms set by the RBI to acquire a banking licence. The central bank’s regulations require that a group to be a promoter of a bank must not have more than 40% of its income from non-financial businesses.

Indiabulls group’s chairman, Sameer Gehlaut decided to give up the real estate business for financial services and sold 14% stake to Embassy group. The deal was part of a three-stage transaction under which a Blackstone Group-Embassy alliance was to acquire Sameer Gehlaut’s 39% stake in the real estate company. As per the terms, Blackstone-Embassy was to acquire Gehlaut’s remaining stake of over 24% subsequently and then make an open offer to the company’s shareholders. However Embassy group eventually decided to complete the said transaction through the merger route.

Embassy group did not put any conditions for Sameer Gehlaut to continue as a non-promoter in the newly formed entity so I guess he may eventually make complete exit to focus solely on financial services. In my view this move augurs well for the investors of IBREL as Embassy group has credibility and good track record compared to IB group.

Latest Shareholding Pattern

At the end of March 2021, Promoter Holding was 11.99% and Embassy holds 13.89% under public shareholder category. FII/FPIs have increased their stake substantially.

Further in May 2021, UK based BAILLIE GIFFORD & CO increased their stake from earlier 3.1% to 5% via open market transactions.

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Breakout today with good volumes. Mostly resembles Cup and Handle pattern.

Disclosure: Not a SEBI registered advisor. Views are personal, not a buy/sell recommendation. Invested and biased.

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I think a lot of the current juice has been extracted at Implied EV of ~21,000 crore today. Most of the assets that you are getting are near completion, on the other hand, it is concentrated in 3 projects if you look closely. Also, the net surplus is realizable over a certain period - lets say 3-4 years, hence your NPVs will be lower. I am betting on the vision of Jitu Virwani and Blackstone combined rather than its valuations. Potentially 70% of quity being held by Blackstone + Virwani is a very enticing idea to play a upcycle in real estate.

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@Kris, thanks for the very good analysis. So based on the current market price (Rs. 154) is it already over priced as per your model? How does it compare with Shoba / Godrej based on cashflow/MCap or EV/EBIDTA ?

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Indiabulls Real Estate Q1FY22 Result looks satisfactory overall as the company posted positive numbers for the third successive quarter, reduced debt and the merger with Embassy group is on track. Stock looks fairly valued now and from here on a lot depends on the completion of merger and the performance of the combined entity.

IBREL Q1FY22 Results

Disclosure: Not a SEBI registered advisor. Views are personal, not a buy/sell recommendation. Do your own due-diligence before investing.

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Hi Kris, thanks for the simple and detailed analysis any risks you see w.r.t the NCLT approval? If you could pls let me know your view.

Summary of Annual Report - https://drive.google.com/file/d/1eye1PJLYWI51pEEr1fgY3QcYKnlQE43g/view

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