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IDFC, Shriram Group end merger talks over valuation differences

30 October, 2017

Financial services conglomerates IDFC Group and Shriram Group have called off negotiations for a proposed merger of some businesses and subsidiaries after failing to agree on the deal structure and valuation.

“IDFC Group and Shriram Group have not been able to reach common ground on a mutually acceptable swap ratio for the merger,” IDFC Ltd said in a stock-exchange filing on Monday. “Accordingly, both parties have agreed to call off discussions on a potential merger.”

The two groups had, in July, signed a 90-day confidentiality and exclusivity agreement for a potential merger of certain businesses and subsidiaries. On 5 October, they extended this period by a month to 8 November.

The proposed merger would have created a large diversified financial conglomerate with almost 2,000 branches, 6.5 million customers and 50,000 employees.

IDFC, which launched banking operations in 2015, would have got access to Shriram’s large retail customer base. As per the proposal, Shriram Group’s consumer lending arm was to be merged with IDFC Bank.

IDFC Bank has been striving to establish a strong retail franchise and had said that acquisitions would be a part of its strategy to increase its customer base. In 2016, IDFC Bank acquired Grama Vidiyal Micro Finance, which gave it access to 1.2 million rural and semi-urban households in Tamil Nadu, Kerala, Karnataka, Puducherry, Maharashtra, Gujarat and Madhya Pradesh.

The merger plan also entailed Shriram Transport Finance Ltd as well as the unlisted life and general insurance firms operating as standalone companies under IDFC Ltd.

The proposal needed clearances from the Reserve Bank of India, the Securities and Exchange Board of India, the Competition Commission of India and the Insurance Regulatory and Development Authority of India.

However, several analysts doubted the deal’s benefits as Shriram Group had divergent businesses and had limited synergy and cross-selling potential to the customers of IDFC Bank.

Investment bank Jefferies said in a July report that, for the merger to go through, the swap ratio would have had to be favourable for shareholders of Shriram Transport Finance given that it accounted for about 40% of loan book and 50% of profits. The proposed transaction also raised concerns among investors about IDFC’s ability to run the vehicle finance business.

According to a July report by brokerage Edelweiss, IDFC Bank would have been relatively better placed while Shriram Group would have been in a “compromising” position. But it added that a lot would depend on swap ratios.

The collapse of the merger talks means it is status quo for private equity backers and strategic investors of IDFC and Shriram group companies.

Billionaire Ajay Piramal-led Piramal Enterprises Ltd holds a 20% stake in Shriram Capital. It is also the second-largest shareholder in Shriram City Union Finance Ltd and Shriram Transport.

South Africa-based Sanlam Life Insurance and private equity firm TPG Growth both have a stake in Shriram Capital. Sanlam Life, sovereign wealth fund Abu Dhabi Investment Authority and Singapore state investors Temasek and GIC own stakes in Shriram City.

In Shriram Transport, PE firm Apax Partners holds a significant minority stake and Acacia Capital Partners owns a small holding.

IDFC Ltd counts Malaysian sovereign fund Khazanah Nasional Bhd as a shareholder.

Arpwood Capital, founded by veteran investment banker and investor Rajiv Gupta in 2013, was the sole external financial adviser to the deal. Shriram Group had hired law firm Trilegal while Piramal Enterprises had hired Cyril Amarchand Mangaldas for the transaction. AZB & Partners had also been hired to advise on the transaction.

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IDFC, Shriram Group end merger talks over valuation differences

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