IDFC-Shriram merger plan may have to factor in government’s stake dilution concerns

The proposed merger of Shriram Capital and its associate companies with IDFC and its subsidiary IDFC Bank has got bogged down as the two sides have not been able to arrive at a mutually agreeable alternate structure following the dissatisfaction of the government and other IDFC shareholders over terms, said two people familiar with the development. The main cause of concern, which was conveyed at a recent meeting, is the sharp dilution of ownership that will take place, said one of the persons cited above. The government owns a 16.38% stake in IDFC and has two nominees on its board. Also averse to the proposed merger terms is Malaysian sovereign wealth fund Khazanah, which owns about 9.5% of IDFC and has a nominee on the board, said the person cited above. Under the revised merger plan, the government stake is expected to drop to 5% and that of Khazanah will drop to 3%, he said. The IDFC board is likely to discuss the merger proposal and concerns of stakeholders on October 30, when it meets to approve financial results. A decision may be taken on October 30, ahead of the November 8 deadline, already extended by a month, for exclusive negotiations, said a top executive. “We cannot comment on the status of the conversation that is out of the public domain,” said Rajiv Lall, CEO of IDFC Bank. “We will be happy to answer your queries once the relevant board discussions and decisions have been made.” Shriram Group founder R Thyagarajan said discussions are progressing. “Till an agreement is reached, there will be disagreements,” he said. A Piramal group spokesperson declined to comment. “We are currently in our quiet period and consequently unable to provide a response to your queries,” he said. Ajay Piramal bought into Shriram Capital in 2014. Khazanah didn’t respond to an email sent on Friday. ET reported on September 27 that the two sides were planning to work on a new formula to salvage the deal that was supposed to bring two non-banking finance companies, a bank and an infrastructure finance company, under one roof. Under the revised plan, Shriram Transport Finance will remain a separately listed entity while unlisted Shriram Capital gets merged with IDFC Ltd. The key area of difference is the swap ratio, which is seen as being tilted in favour of the Shriram group, primarily due to the high valuation of Shriram Capital’s underlying listed and unlisted assets. Shriram Capital, the holding company of Shriram group owns 26.08% of Shriram Transport Finance Co. (STFC) and 33.8% of Shriram City Union Finance (SCUF). In addition, it fully owns two insurance ventures — in life and general insurance. At current market prices, those stakes in STFC and SCUF are valued at Rs 6,415 crore and Rs 4,660 crore, respectively. The combined valuation of the two insurance companies, which are not listed, will be about Rs 15,000 crore, said a top executive involved in the talks. The combined valuation of the prime Shriram Capital assets will exceed Rs 26,000 crore against IDFC’s current market cap of 10,200 crore. At these levels, the swap ratio will be 72:28 in favour of the Shriram group in the first phase when STFC will be retained as separate listed entity and merged with IDFC in the second phase, said the person. That will mean a further dilution of IDFC’s shareholding. In addition, SCUF, which has a market cap of Rs 13,415 crore, will merge with IDFC Bank that has a valuation of Rs 19,153 crore. This would involve IDFC Bank issuing shares worth Rs 9,100 crore to the public — in lieu of a public shareholding of 66.2% in SCUF — and additional shares worth Rs 4,300 crore to Shriram Capital or IDFC. There are reservations on the Shriram side as well. Apart from the swap ratio, various operational details need to be examined and agreed upon, said a person with the Shriram group. “On operation, we have huge challenges on our side,” he said. “We have about 50,000–60,000 employees on our side, they (IDFC) have about 5,000-6,000 employees and the ambitions of people are different. Their integration needs to be looked at more compassionately.” Key Shriram shareholder Ajay Piramal, regarded as the driving force behind the negotiations, has already expressed concerns, saying the transaction can materialise only if the interests of all Shriram shareholders are fully aligned. Piramal Enterprises, which invested about Rs 4,500 crore in FY15, owns a 20% stake in Shriram Capital and 10% each in STFC and SCUF. Various global investors such as TPG, Apax and South Africa’s Sanlam are shareholders in various Shriram entities.
Source: ET