IDFC, Shri­ram End Merger Talks over Valu­a­tion Is­sues

Dis­agree­ment over price was sole hur­dle, says IDFC Bank chief ex­ec­u­tive Ra­jiv Lall

The Economic Times - - Front Page - Our Bureau

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.”


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