Analjit Singh-promoted Max Financial Services Ltd and mortgage lender HDFC have frozen a deal to merge their life insurance arms to create the largest private life insurer in the country. KKR-backed Max Financial, the listed holding firm for Max Life, would hive off the non-insurance business into Max India.
"The proposed transaction creates a Rs 255 billion annual premium company, with scale, differentiated portfolio and wider reach to expand in a growing life insurance sector," said HDFC Ltd, parent of HDFC Life, in a statement.
The new merged insurance entity – HDFC Life – will become a listed company wherein HDFC Life will hold 69% in the entity while Max Life will hold the remaining, the statement said.
The merger initially involves the amalgamation of Max Life with Max Financial Services. For this, the shareholders of Max Life will get one share of Max Financial Services for approximately five shares of the former.
The life insurance unit will then be demerged into HDFC Life. Separately, Max Financial Services will be merged into another listed company of the Max group – Max India.
For the demerger, the shareholders of Max Financial Services post the amalgamation with Max Life will get 2.33 shares of HDFC Life for each share of Max Financial Services.
Further, the merged insurance entity will be paying a non-compete fee to the promoter group of Max Financial Services as a part of the proposed transaction, the statement said.
"The term of non-compete would be four years since the payment of an upfront fee of Rs 501 crore which will be payable post completion of the proposed transaction. This will be followed by three equal annual installments totaling Rs 349 crore," it added.
The proposed transaction, which will require regulatory approvals from various bodies including Insurance Regulatory and Development Authority of India, Competition Commission of India (CCI), Securities and Exchange Board of India (SEBI), stock exchanges and High Courts, is expected to complete in the next 12-15 months.
HDFC Life has also entered into a trademark licence agreement to use the ‘Max’ brand as part of life products that will transition from Max Life, for seven years post completion of the proposed transaction.
“Max Life and HDFC Life have complementary strengths which would make this merger hugely beneficial for all stakeholders including customers, employees, distribution partners and investors,†said Analjit Singh, founder and chairman emeritus of Max Group.
HDFC Ltd and Max Financial Services Ltd had agreed to discuss a possible merger of their life insurance businesses early in June.
HDFC Life is a joint venture between the Indian mortgage lender and the UK-based Standard Life Plc. HDFC holds 61.65% and UK-based Standard Life 35% of the insurer; minority shareholders hold the remaining. Its total premiums for the year ending March 31, 2016 were at Rs 16,313 crore and total AUM was at Rs 74,247 crore.
Max Financial is India’s first listed company focused on life insurance. It owns 68.01% of Max Life while Japan's Mitsui Sumitomo Insurance Co holds 25% and Axis Bank the remaining 5.99%. Max Life's total premiums for the year ending March 31, 2016 were at Rs 9,216 crore and total assets under management (AUM) were at Rs 35,824 crore.
Agents and corporate agents (including HDFC Bank and Axis Bank) will continue their strategic distribution partnership with the merged insurance entity HDFC Life, it added.
Arpwood Capital and Morgan Stanley acted as the financial advisors to HDFC Life while Shardul Amarchand Mangaldas acted as the legal advisor. AZB & Partners advised HDFC Ltd and Cyril Amarchand Mangaldas represented Standard Life (Mauritius Holdings) 2006 Ltd. For Max Life, Ambit acted as the financial advisor to Max Life. AZB & Partners acted as legal advisor to Max Life and Max Financial Services and Cyril Amarchand Mangaldas advised MSI, Japan.
Currently, India's life insurance sector is largely dominated by state-run Life Insurance Corp while SBI Life, a joint venture of State Bank of India and BNP Paribas, and ICICI Prudential Life Insurance are the top two private-sector life insurers by premium income with HDFC Life ranked third.
ICICI Prudential Life is also looking to float its IPO and recently hired bankers to manage the offering that could raise as much as Rs 6,000 crore. The insurer is backed by Singapore state investment arm Temasek, which acquired a 2% stake late last year in a deal that valued the insurer at Rs 32,500 crore. This transaction also included PremjiInvest, the private investment arm of Wipro chief Azim Premji, buying a 4% stake in ICICI Prudential.
The proposed merger comes just months after Max Group announced that it will split into three separate listed companies housing different businesses. Post the split, the group's erstwhile listed company Max India was renamed as Max Financial Services Ltd (MFS) focusing on solely on the group's flagship life insurance activity through its majority holding in Max Life. The second unit the new Max India houses the investments in the health verticals and the third entity Max Ventures and Industries Ltd (MVIL) houses the manufacturing subsidiary—Max Speciality Films. The second and third entities were recently listed as well.
The demerger of the Max Group into the three separate listed entities has translated into a value unlocking exercise for its investors including Goldman Sachs and International Finance Corporation (IFC).
Shares of Max Financial Services fell 1.58% to Rs 542.30 on Monday while the Sensex rose 0.37%.
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