Phoenix Mills-GIC deal is positive, but knowing actual cash inflow is crucial

A potential deal between mall developer Phoenix Mills Ltd and private equity firm GIC has got the Street excited.

Phoenix Mills has signed a non-binding term sheet with GIC, to sell a 26% stake in select assets. These include its Mumbai (Kurla) and Pune malls and Mumbai (Kurla) offices having a total leasable area of 3.36 million square feet. The total enterprise value (EV) for these units has been pegged at around Rs5600-5700 crore. Phoenix said that it intends to use the proceeds from this deal to fund its growth plans via greenfield and brownfield expansions.

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Reacting to this development, the stock surged over 11% on the National Stock Exchange on Wednesday. Closure of the deal would mean additional cash inflow to its already strong cash reserves of around 1,800 crore, say analysts.

Analysts say the valuation of this deal is attractive and instils confidence about the sector’s assets. It indicates that private equity investors are ready to pay a premium for these assets in spite of the lockdown having impacted consumption and rental income for FY21, they said.

“The deal is much better versus our EV estimate of Rs4800 crore for these assets,” analysts at HDFC Securities said in a note to clients on 2 December.

Clearly, the stock’s sharp run-up reflects these positives. However, the actual cash inflow – the most crucial part, would be known only after the deal is finalised. “Since it is a mix of primary infusion and secondary purchase of equity shares, actual inflow is not known now,” brokerage house ICICI Direct said in a report.

Analysts estimate that after adjusting for Phoenix’s Rs1600 crore debt, cash flow of around 1,000-1,500 crore could come from this deal. Also, GIC has an option to increase its stake in these assets to 35% within 12 months of the proposed transaction. If the company opts for this alternative then that would translate into 1,500-2,300 crore of cash flow, analysts at Antique Stock Broking Limited said in a report.

Analysts also warn that the Street seems to have priced-in the best-case scenario from this deal. Note that the transaction is currently non-binding and subject to signing of definitive agreements and due diligence. So, it will take some time to get clarity on the nature of the deal. Also, there are some near-term risks due to uncertainty around regional lockdowns, and investors need to be watchful of those. There could be an impact on footfalls and rental incomes for mall developers, which can impact valuations. Having said that, the prospect of high cash inflows is certainly a welcome development.

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