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.
