Japan’s largest life insurer Nippon Life Insurance Company has signed an agreement with Reliance Capital Ltd to buy 26 per cent stake in Reliance Capital Asset Management Ltd (RCAM) for Rs 1,450 crore ($290 million). RCAM is part of the public-listed Reliance Capital, the flagship financial services company under Anil Ambani-led Reliance ADA Group.
The deal values India’s second largest asset management firm at Rs 5,600 crore ($1.1 billion) or 6 per cent of assets under management (AUM) worth Rs 93,148 crore ($19 billion) as of September 30, 2011, across mutual funds, managed accounts and hedge funds.
This is a big climb-down from the valuation of around Rs 10,000 crore, set by global investment firm Eton Park when it invested Rs 500 crore to acquire 5 per cent stake in Reliance Capital Asset Management just weeks before the stock markets crashed worldwide because of the sub-prime crisis in the West.
At that time, Reliance was India’s largest asset management house. However, analysts felt that Eton Park invested at an aggressive valuation as a proportion of AUM. Valuations across financial services sector have moderated sharply since then and Reliance has been facing strong competition.
Reliance Capital Ltd scrip was up 3.85 per cent and was quoting at Rs 330.10 a share on the BSE in mid-day trade on Thursday in a strong Mumbai market.
In the quarter ended September 30, 2011, HDFC pipped Reliance to become the country’s largest asset management house. According to mutual fund industry body AMFI, for the quarter ended December 31, 2011, HDFC had AUM around Rs 88,737 crore, compared to Reliance’s assets of Rs 84,300 crore.
Since the latest transaction is a fresh issue, Eton Park’s holding will shrink by around a quarter to 3.75 per cent, valued at Rs 210 crore or less than half its investment in late 2007.
To be fair, even in the latest deal, Reliance has managed to strike a transaction at the upper end of the valuation range, compared to other deals in the asset management space over the past 3-4 years. While IDFC acquired Standard Chartered MF for Rs 831 crore at 5.7 per cent of AUM, Religare took over Lotus MF for an undisclosed sum in what was believed to be pegged at just around 2 per cent of assets under management. The latter took place in November 2008 – weeks after Lehman Brothers filed for bankruptcy protection – triggering a domino effect to global corporate valuations.
Among other deals, T Rowe Price acquired 26 per cent stake in UTI Asset Management Co Ltd for Rs 650 crore, 3.2 per cent of its assets under management; Nomura picked up 35 per cent stake in LIC Mutual Fund Asset Management Co. Ltd at 2.4 per cent of AUM and L&T Finance acquired the asset management business of Cholamandalam DBS Finance Ltd for 1.5 per cent of the AUM.
More recently, IDFC sold 25 per cent stake in its asset management arm to Natixis Global Asset Management, a French fund manager, in what was said to have valued the business at around 6 per cent of AUM.
The latest deal between Nippon and Reliance is an extension of their existing partnership in the financial services domain. Nippon had recently struck a deal to acquire 26 per cent in Reliance Life Insurance Co Ltd for Rs 3,062 crore ($680 million), valuing it at approximately Rs 11,500 crore ($2.6 billion). Thereafter, the partners had said that they intended to expand the scope of their existing business partnership to other financial services, such as asset management.
Reliance Capital has interests in asset management and mutual funds, life & general insurance, commercial finance, equities & commodities broking, investment banking, wealth management services, distribution of financial products, exchanges, private equity, asset reconstruction, proprietary investments and other activities in the financial services space. It is also believed to be looking for a banking licence.
VCCircle had earlier reported that the most significant synergy between Reliance and Nippon could be in the asset management business. So the latest deal comes as no surprise.
Nippon Life is a 122-year-old global Fortune 100 company, seventh largest life insurer in the world and the largest private life insurer in Asia and Japan. Nippon Life Insurance posted revenues of $80 billion and a profit of $3 billion for the fiscal year ended March 31, 2011.
The company sold around 1.2 million policies, taking the total number of policies in force to more than 14.5 million as on March 2011. In addition to selling life insurance products, the company offers various other products, such as defined contribution pension plans and medical coverage plans.