Coffee Day Enterprises board approves divestment in GVT Park to Blackstone; what are key hurdles?

In a bid to deleverage the group and reduce the company's debt of over Rs 6000 crore, the board of Coffee Day Enterprises Limited (CDEL) - in its meeting held earlier today - approved the divestment of Global Village Tech Park held by its subsidiary Tanglin Developments to Blackstone. The transaction valuation, according to the company, is anywhere between Rs 2600 to Rs 3000 crore. CDEL has signed a non-binding letter of intent. The closure of the transaction will be subject to Blackstone completing due diligence, documentation and receiving regulatory approvals. The company expects the formalities to complete in the next 30-45 days. Under the current circumstances, will it be easy for Blackstone to close the transaction or it will hit roadblocks?

Tanglin and its transactions

According to the regulatory filing, as of March 31, 2018, CDEL, the largest shareholder in Tanglin Development, held 51,31,651 shares in the company along with seven other members including late VG Siddhartha, the founder of the company and his wife Malavika Hegde. As of end of March 31, 2018, total sales had increased  to Rs 134.26 crore from Rs 122.95 crore the previous year. However, profit after tax reduced significantly from Rs 34.47 crore in March 2016-17 to Rs 9.3 crore in March 2018, largely owing to increased expenses that shot up from Rs 135.41 crore in March 2016-17 to Rs 211.1 crore in March 2017-18.

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The Global Village Tech park situated on Mysore road in Bengaluru is now a prime piece of real estate spread over 120  areas. It houses headquarters of Mindtree. Several companies such as Globaledge software, Magnasoft, NTT data and Textron have their offices at the tech park. Tanglin also has a technology park development project in Mangaluru where land acquisition has been completed.

Key hurdles

Interestingly, the letter of intent signed by both the parties is of a non-binding nature, essentially leaving room for doubts around the closure of the agreement given the intricate intercompany pledging that the entire group currently is staring at. A cursory look at the filing suggests that Tanglin Developments had created a charge on some of its assets around January 21, 2019 and had raised Rs 915 crore from Axis Trustee Services Limited  and more clarity has to emerge on this issue.

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Secondly, now that the company has appointed Ernest & Young as auditor to look into financial subsidiaries of CDEL, industry watchers are apprehensive about Blackstone signing the pact before auditors present the report. One of partners at BDO, who did not wish to be named, said, "When the entire group financials are under question and several admitted transactions are bad, PE players will be more careful when they look at a deal like this," he said. While Blackstone may have already done its preliminary legwork on the deal, closure will require regulatory approvals, which will be under greater scrutiny given circumstances of promoter's debts and admitted defaults.