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Sunday, July 14, 2013

RCom to spin off land assets

My colleague Beryl Menezes co-authored this story first appeared in DNA Money edition on Monday, July 8, 2013.

Reliance Communications (RCom) on Sunday announced demerger of its real estate business into a separate entity to be called Reliance Properties, subject to “approvals from shareholders, lenders, courts”.

The real estate firm will likely be listed within four months. RCom shareholders will be given one share in Reliance Properties free for every one share of RCom they possess.

Analysts pegged the indicative value of one share of Reliance Properties at Rs 60, while the market price of an RCom share is Rs 130. This translates to almost 50% enhancement in the RCom shareholder’s value.

Analysts said the spin-off decision looks like a ‘desperate attempt’ by the highly leveraged RCom to pare its Rs 38,864 crore debt as of March this year.
Assets of Reliance Properties will include RCom’s prime property in Dhirubhai Ambani Knowlegde Centre (DAKC, pictured) in Navi Mumbai and a prime property near Connaught Place in Delhi.

RCom also has land in the new business district in Hyderabad and in Kolkata, which may also be considered for possible sale at a later stage.

The collective monetised value of 135 acres in Mumbai with a saleable area of 15 million square feet and four acres in Delhi is estimated to be about Rs 12,000 crore.

RCom said in a statement that it will now focus on its core wireless telecom and enterprise business.

An RCom spokesperson said the demerger will a transparent process and would not impact RCom’s profitability.

Analysts said the demerger seems to be aimed at creating large shareholder value, similar to the value created from the initial demerger of the Anil Ambani-led Reliance Group from Reliance Industries in 2005.

Sources said that RCom may be in discussions with one or more suitable investors already. RCom’s management on Sunday admitted that Reliance Properties would be also working with foreign investors to sell / lease its real estate assets.

Further details about the new company – management, headquarters, so on – will be revealed once the mandatory approvals are obtained.

In December 2012, RCom had entered into an agreement with Wanda, China’s leading real estate group, to lease out assets in DAKC and Hyderabad. RCom confirmed that the property up for grabs as part of Reliance Properties would be separate from that currently under development by the Wanda group.

Harit Shah of Nirmal Bang said, “The (spin-off) move is positive for (RCom) shareholders, as the land was not being used. Now, it will generate some value.

While the benefit to RCom will accrue only after the process of acquiring a stake in Reliance Properties is complete, the fact that the company had to hive off its real estate assets due to the debt burden, even when it has better assets like FLAG, which it is unable to sell, speaks volumes about the current state of the company. Even after floating Reliance Properties, what is key for RCom is to get the actual valuation of the land from investors, as estimated by the company.”

Sanjay Dutt, executive MD-South Asia, Cushman and Wakefield, a real estate firm, said, “Large corporates that are under financial pressure tend to use their non-performing assets to raise funds for the core business. While this is not a bad strategy – it was earlier used by Siemens, Tatas and HUL – ideally, RCom should have sold the land assets, as they are not a real estate company.

Further, one would have liked to know what is the vision of the company and whether the alternate route (if somebody wants to unlock the value of the unutilised assets) is to auction, sell land, put the money in the bank or give it to the shareholders and be happy.”

Ambar Maheshwari, MD-corporate finance, Jones Lang LaSalle, another property firm, said, “Real estate prices have gone up despite the tough economic environment in the last few years. Most corporates are looking at somehow monetising or optimising it.”

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