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Entrepreneur Analjit Singh is renowned for navigating many regulatory obstacles when it comes to completing a deal. But the year 2017 was not his. A transaction – the planned merger of HDFC Life and Max Life – would have created a life insurance behemoth that would have been the envy of everyone, but that was not to be.
It was the insurance regulator which threw a wrench in the transaction. Not that the IRDA was unhappy with the merger, but the structure of the deal did not fit into the law that it administers, so it said.
The insurance regulator had objected to the original deal structure on the grounds that it proposed the union of an insurer with a financial services company, for which there is no scope. The plan involved holding company Max Financial Services first merging with Max Life. That was to be followed by a demerger of the life insurance business, which would subsequently be amalgamated with HDFC Life. What was supposed to be an icing on the cake was a non-compete fee of Rs850 crore to Max’s Singh.
There was a bit of ping-pong between the regulator and the bureaucracy in New Delhi. The regulator referred the proposed structure to the finance ministry, which, in turn, sought the law ministry’s views on the matter. The attorney general disappointed by not putting a seal of approval on the deal.
Post the break-up, HDFC Life decided to move ahead on the path it had planned before the proposal from Max – an initial public offering. It is listed with a valuation steeper than its bigger peers. But what’s Max up to?
Marriage of Unequals
For some strange reason, an eighty-year-old conservative and a theoretician decided to get into some adventure.
Shriram Group founder R Thyagarajan, fondly known as RT, and IDFC Bank’s Rajiv Lall decided to combine their businesses that would have created a pan-India financial conglomerate.
The optimist in Lall described the engagement as a “marriage made in heaven.” But it broke down even before the ink was dry on the wedding invitation.
To start with, it was a marriage of unequals. There were not only cultural issues, but also potential regulatory obstacles with Ajay Piramal as a significant shareholder in the merged entity. But the two decided on a courtship for 90 days. The merger that could have created a financial giant with a market value of at least Rs 72,000 crore and footprints across all business segments, was cheered by IDFC Group’s shareholders. Other problems like valuations cropped up. Rumours were flying thick and fast that big shareholders of the bank were not agreeable to whatever was being discussed.
“The only reason the deal did not go through is that we could not arrive at an agreement on relative value,” Lall, CEO of IDFC Bank, told ET. “That was the only reason. The other thing I would like to highlight relates to the impression that IDFC shareholders have been difficult to convince. This is not true.”
But the grand old man of finance from Chennai has not given up as yet. “We said that the exclusivity period is terminated. It is not as if the deal has been called off,” Thyagarajan told ET. “There was no agreement on the relative valuation reached. It does not mean that an agreement cannot be reached in the future. It could happen — either by them coming down, or we going up.”Which way now?
One of the handicaps that arise from a bull market in equities is that transactions in the MA world are difficult to complete.
The expectations of sellers keep soaring along with the gains in the Sensex, which is difficult for a long-term investor to keep pace with.
The deal between Prem Watsa and Catholic Syrian Bank (CSB) failed. After painful negotiations for more than a year, Watsa, aka Canadian Warren Buffett, decided to call off the talks after the bank management moved the goal post on valuations after initial agreements.
In fact, the conservative Reserve Bank of India was playing ball with investors since its consent for Rana Talwar Co’s purchase of Centurion Bank. The central bank had given a preliminary regulatory approval to Fairfax Financial to buy a 51% stake in CSB in an unprecedented move. While Watsa’s Fairfax offered approximately Rs100 per share, the bank had sought a share value of Rs165 in addition to a premium of Rs15 apiece.
It is nothing new when sellers seek higher prices in a bull market, but the question is — with the changing scenario in banking due to technological and regulatory developments, how long would old private sector banks with ‘brick and mortar’ as their strength, generate interest. CSB has resumed talks with investors. But are there any takers?
A Reluctant Bride
This was one transaction that could have masked the roughness the banking industry faced in 2017. But it didn’t happen.
Speculation was rife about a potential merger of Axis Bank with Kotak Mahindra Bank that would have created one of the largest private sector banks in India with a market share of 6%. A stock swap deal might have been a perfect fit for Uday Kotak, who has to bring down his stake in the eponymous bank to 20% by 2018, to comply with the regulatory mandate. Axis would have been ideal for Kotak, who has been looking for a strong retail franchise with significant low-cost deposits.
But Axis Bank CEO Shikha Sharma, who has secured another three-year term that would end in 2021, had different.
“It is good to feel like a beautiful bride that everybody is aspiring for, but the point is that the beautiful bride is not putting up her hand for marriage,” Sharma had told ET. “You can have a lot of suitors, but there is not going to be a marriage.”
But Kotak, who made his name as a rainmaker, had this to say on how he planned to go about his venture: “We are looking at various options across financial services and we are looking at various options for the creation of value for our stakeholders in whatever shape or form it comes.”
Meanwhile, Sharma has brought in buyout firm Bain as a cushion, but remember Kotak had waited for nearly seven years to pounce on ING Vysya after first setting his sights on it!