We Could Not Ar­rive at A Rel­a­tive Value for the Deal

The Economic Times - - Money -

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.

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