We Could Not Arrive at A Relative Value for the Deal
The most audacious and complicated takeover ever proposed in India’s financial services industry involved IDFC Bank and Shriram Capital. Many theories are doing the rounds on the reasons behind the deal’s collapse. In an interview with Shilpy Sinha and MC Govardhana Rangan, IDFC Bank’s Chief Executive Rajiv Lall says that the lack of agreement on relative valuations caused the deal to founder. Edited excerpts;
What broke the deal? In the last couple of weeks, it was clear that the deal was not going to happen. The only reason the deal did not go through is that we could not arrive at an agreement of relative value. That was the only reason. The other thing I would like to highlight relates to the impression that IDFC Ltd shareholders have been difficult to convince. This is not true. We submitted the proposal to both the IDFC Ltd board and the IDFC Bank board. We presented the business case, got feedback from all shareholders about their expectations and basis all that information, at the board level, we came to a view on what the appropriate valuation is at which we will do the deal. We had the support of our majority shareholders.
Then why could you not proceed with the plan? We developed a point of view of what the price should be and we then made an offer. There are two parts to the offer. IDFC Bank and Shriram City Union, which is less complicated because both companies are listed. Complications arise at the IDFC SCL level because SCL is unlisted and IDFC is listed. Our view was that it is no rocket science to arrive at appropriate valuation. IDFC Ltd shareholders were saying that there should be a holding company discount to the assets that both sides bring to the table, an appropriate holding company discount that is value accretive for both parties. The valuation that we proposed to our counterparts was discount to sum of the parts value greater than we believe they would be getting in the merged entity. We thought it was very fair. The other thing is we never got a formal counter offer from them that our board would evaluate to assess whether we could bridge the gap.
Why are you calling it off 10 days before the deadline ends? 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 cannot be any meeting of minds. Then why waste time. Just end the exclusivity period so that we can get on with our lives. We had many more shareholders to deal with. They had only four. It should have been easy for them to arrive at a valuation.
Both IDFC and Shriram are holding companies. So, where was the difference? This was my thinking too. We thought there would be some reasonable meeting ground, especially given the strategic value of the companies. For the AMC, there are transactions. You take some percentage of AUM and it gives you the value.
Did you want them more than they wanted the IDFC Group, because they did not even come up with an offer? We walked out of the deal.
Was the complex structure the reason behind the deal’s collapse? It was complex no doubt. There are four listed companies. Now, in retrospect what I can say is we made the announcement because there were listed companies involved. It was impossible for any listed company to have open negotiations.
When you announced the deal, you said it is a marriage made in heaven… Marriages can be made in heaven but we live on earth. Not all marriages made in heaven can be consummated on earth. We started with the broad intuition that the strategic fit is very powerful and that we will find some middle ground on valuation, however complicated it is. It is in both parties’ interest. We had to give some holding company dis- count, not unreasonable and their shareholders would get an exit.
How do you assign values to unlisted holding companies? There are market benchmarks on both sides. They are equally frothy. There is not much dispute on valuation of unlisted companies. There is holding company discount. In one case, you could value holding company because it is listed and in the other it is not crystallized because it is not listed. You could have differences in perception. We were looking to transfer 26% of Shriram Capital into the holding company.
What gave you the optimism, knowing the complexity of the deal? You have to exercise your imagination. If I had known that we would not be able to bridge the valuation gap, we would not have entered into the deal. At that time, a lot of people were not convinced about the business aspect of the deal. In the 100 odd days, we made people comfortable with the integration, regulatory challenges and convinced our shareholders about the good strategic fit. In the last four weeks, we saw that the valuation mismatch would be a big gap.
If the holding company valuation was the thorn, you could still have gone with merger of IDFC Bank and SCUF….. The heart of the deal for us was SCUF and IDFC Bank. The issue there was that SCL cannot spin off SCUF as a separate business because that demerger is tax inefficient from them. That’s how we ended up with the broader conversation. SCL has a similar kind of challenge that IDFC Ltd has. We explored all the options. For tax reasons that was unfortunately not working.
Was Shriram a distraction that slowed your business? No. We for the first time have stripped out the legacy from the bank. We have been focusing on the asset side, excluding infra. Our funded credit outstanding has grown by 76% from ₹ 13,000 crore to ₹ 25,000 crore. Quarter on quarter, our funded credit growth excluding infra has been 15%, which is much more than the industry. Our retail portfolio is ₹ 18,000 crore. Of this, ₹ 5,000 crore is directly originated from us and ₹ 13,000 is portfolio purchased. We have met all our PSL requirements. The only sub category that we were not able to meet was agri. Our direct retail book has grown 38%... We are confident that the retail book will cross ₹ 8,000 crore. Six months ago, I would not have the measurable metric to share because our products were not fully built out. Now, I am in a position to share our goal for FY20. Our CASA ratio is 8%, and we intend to take it to 10% by the end of the year. By FY20, our CASA ratio should be over 20% of the book.
If you are doing so well, why do you need inorganic growth? This is where the bad bank comes in. We have been diffident all this while. We have been doing all this despite all our challenges. Our P&L is dragged for two reasons. First would be the underperforming assets that earn less than markets. I am carrying ₹ 36,000 crore of fixed rate bonds from my previous avatar at an average rate of 8.9%. The big problem with infrastructure companies is where bonds have a fixed price and assets are repriced every six months. Yields on corresponding assets have come down and this negative drag costs me ₹ 400 crore every year.
Can a PSU bank be the next stop after the re-capitalisation, with the government also talking about consolidation? We will see who the money goes to. There is nothing on the table. The problem is how do you do the due diligence to know how bad the situation is. There has to be an independent third party to say how bad the situation is. The challenge is that the regulator cannot share the information.