IDFC – Shriram merger talks called off on differences over swap-ratio

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Mumbai: IDFC Ltd and Shriram Group on Monday called off their planned merger following differences over valuation. IDFC management said that it will continue to look at buying or merging with other non-banking financial companies at the level of IDFC Bank.

In a notification to stock exchanges, IDFC said that despite best efforts, the two entities were not able to find common ground on a mutually acceptable swap ratio for the IDFC-Shriram merger.

“Accordingly, both parties have agreed to call off discussions on a potential merger and the exclusivity period pursuant to the CES agreement entered into between the concerned parties stands terminated with immediate effect,” the notification said. CES refers to confidentiality, exclusivity and standstill.

“The decision to call off the deal is good for the shareholders of both the entities as it would have been value destructive,” said Ashutosh Mishra, banking analyst at Reliance Securities.

Image courtesy : The Economic Times

IDFC and Shriram had announced their merger plan on 8 July, agreeing to a 90-day exclusivity period to complete the due diligence process. The exclusivity period was later extended until 8 November. Under a three-tiered structure, the retail arm Shriram City Union Finance Ltd was to be merged with IDFC Bank Ltd; Shriram Transport Finance would become a fully owned unit of IDFC and be delisted; and IDFC would also become the holding company for the Shriram Group’s insurance businesses.

But the talks failed following valuation concerns raised by some IDFC shareholders, including Enam Holdings and Sipadan Investments (Mauritius) Ltd, a unit of Malaysian sovereign wealth fund Khazanah Nasional Bhd.

Some IDFC shareholders were demanding a 60% premium to the current market value of the company, fearing a diminution of their holdings in the merged entity. Khazanah and Enam hold around 15% in IDFC while the government holds 16.4%.

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Rajiv Lall, chief executive officer and managing director of IDFC Bank Ltd, said that the swap ratio IDFC proposed was one where it was “confident (of) carrying all our shareholders”.

“That swap ratio was not at all unreasonable in our estimate. It was such (a ratio) that it had us take a greater discount to sum of parts valuation than Shriram Capital,” said Lall.

Lall further said that Shriram did not come back with a counter offer despite having fewer key shareholders. He also added that a deal involving only the consumer finance arms of both groups might have worked. “If the deal could have been unbundled we might have been able to save the deal. If we break Shriram Capital into its parts, we would have been able to save the deal. The easiest deal would have been to (merge) Shriram City Union Finance and the (IDFC) bank. Because of Shriram Capital’s structure that was not feasible,” said Lall.

The merger with Shriram would have given IDFC Bank a network of 10 million customers of Shriram which could have been used to cross-sell the bank’s products. For Shriram, merging with IDFC would have given it access to lower cost of funds, besides newer revenue streams from cross-selling products. The IDFC-Shriram merger deal was also considered to give shareholders like the Piramal Group a backdoor entry into banking.

Lall said that IDFC will continue to look at inorganic opportunities for IDFC Bank in an effort to boost its return on assets (RoA). “We are still looking at inorganic. At this pace, it will take us three to three-and-half years to grow out of our legacy,” said Lall.

“We will look at less complex deal without involving IDFC (the parent),” he said.

IDFC shares fell 2.68% to close at Rs61.70, while Shriram City Union Finance rose 1.93% to Rs2,186.25. The benchmark Sensex rose 0.33% to 33,266.16 points.