IDFC, Shriram End Merger Talks over Valuation Issues
Disagreement over price was sole hurdle, says IDFC Bank chief executive Rajiv Lall
Mumbai: IDFC Bank and Shriram Capital scrapped merger plans to create what would have been one of India’s biggest financial services conglomerates after four months of negotiations during which they couldn’t agree on valuation.
Shriram Capital, the bigger of the two entities, did not respond to a swap ratio proposed by IDFC Bank, forcing the Mumbai-based lender to end negotiations ahead of the November 8 deadline for the conclusion of exclusive talks between the two, IDFC Bank chief executive Rajiv Lall said in an interview. ET had reported on Monday that the merger was set to be called off.
“We developed a point of view of what the price should be and we made an offer,” Lall told ET. “We came to the conclusion, because they were not able to give us a counter offer, it means that our valuation ask is so unreasonably high that there can’t be any meeting of minds. Then why waste time? Just end the exclusivity period so we can get on with our lives.”
The two financial groups had announced in the first week of July that they were exploring a merger that would have created a retail financial group with businesses ranging from motorcycle financing to insurance to mutual funds. IDFC Bank was looking to establish itself in banking after it got a licence in 2014. Shriram, controlled by billionaire Ajay Piramal, wanted to enter the banking space to reduce the risk of market volatility.
“We could not arrive at a relative valuation… the extent of dilution for each party. The extent of dilution was deeper but they expected more. We walked out of the deal,” Lall said. “The only reason the deal didnt’ go through is because we could not arrive at an agreement on relative value — that was the only reason. The other thing that I would like to highlight is that the impression that is given is that IDFC Ltd shareholders have been difficult—this is not true,” he said. The proposed merger process was a complicated one involving holding companies on both sides. Chennai-based Shriram Capital is engaged in insurance, truck financing and consumer lending. IDFC has mutual funds, private equity and investment banking businesses along with IDFC Bank. Of these, four units were listed. “IDFC Ltd and IDFC Bank announced today that they are discontinuing discussion with the Shriram Group with regards to a potential merger,” IDFC said in a press release on Monday. “Despite best efforts, the two groups have not been able to reach an agreement on a mutually acceptable swap ratio. Accordingly, the exclusivity period stands terminated with immediate effect.”
At the time of the proposal, Lall had said it was a marriage made in heaven. “Marriages can be made in heaven but we live on earth,” he said on Monday. “Not all marriages made in heaven can be consummated on earth.”
The initial proposal was that retail consumer centric business of the holding company Shriram Capital — Shriram City Union Finance — would be merged into IDFC Bank. The transport finance business would remain a standalone non-banking finance company that would become a subsidiary of IDFC Ltd. Other businesses such as insurance were also to come into the IDFC Ltd fold. The share swap ratio and other details of the merger would be worked out three months hence, the companies had said then.
There had been speculation that some minority IDFC stakeholders were unhappy with the amount of dilution that the deal would entail. Stakeholders like Malaysia’s Khazanah were said to be against dilution.
The deal didn’t have enough support from either side, an analyst said. “The valuation Shriram was asking was too high and would have been too much of a dilution for IDFC Bank,” said Asutosh Mishra, analyst at Reliance Securities. “It would have been a value destruction deal for the bank. For shareholders of Shriram Transport Finance too becoming a part of the IDFC holding company would have meant a15-20% destruction in value. IDFC Bank balance sheet is also not large enough to absorb such a big company. There were always regulatory challenges for this deal and clearly it didn't have the backing of all shareholders in Shriram.”