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IDFC, Shriram group enter merger talks. What do brokerages say?

Reacting to the development, shares of IDFC and IDFC Bank jumped around 8% and 4% to Rs 64 and Rs 68

Puneet Wadhwa  |  New Delhi 

IDFC Bank MD Rajiv Lall (left) and Shriram Capital Chairman Ajay Piramal in Mumbai on Saturday.	Photo: Kamlesh Pednekar
IDFC Bank MD Rajiv Lall (left) and Shriram Capital Chairman Ajay Piramal in Mumbai on Saturday. Photo: Kamlesh Pednekar

and unveiled their intent, on Saturday, to merge the two entities and have entered into an agreement to evaluate the proposal for 90-days. 

As per the proposed plan, Ltd will be the holding company of the merged entity. will be merged with Bank and Finance will be a fully owned subsidiary of IDFC, which will also own 75% of the life and general insurance arms of Shriram Capital.

Also Read: Lack of succession plans pushing Shriram towards merger, say staff

Reacting to the development, shares of and Bank jumped around 8% and 4% to Rs 64 and Rs 68 levels, respectively in pre-opening trade. On the other hand, Finance and rallied 9% and 2.5% respectively to Rs 1,100 and Rs 2,550 levels respectively. By comparison, the 50 traded flat at 9,665 levels, up 8 points, or 0.1%.

Though the finer details of terms and conditions of the proposed merger haven’t been made public, here’s what leading research houses and brokerages think of the deal:

MACQUARIE

If I am a Finance shareholder, I will land up getting shares in Ltd, which will have all other businesses – banking, life, general insurance etc which I don’t want. Plus the structure is inefficient as it would entail a holding company discount. Unless the shareholders of SHTF are compensated in terms of a huge premium, the deal should be opposed by them. As per management, they have already taken Sanlam – one of the large investors in on board with respect to this merger.

Also Read: Personal chemistry sealed Piramal's investment in Shriram

As per the universal banking license guidelines issued, all lending related businesses under the holding company structure should be held in a bank. So we are surprised that can have Bank and separately. management feels that its doable and they have made necessary consultations with experts and will approach RBI.

It is going to be a very time consuming process as it is a very complex merger. The merger approval process itself could take 12 months and another 2 years for integration. Technology and cultural integration will be a huge challenge. Business could suffer during this period. There could be brand confusion – both the brands will coexist. There could be exits of some important staff members of in our view.

JEFFERIES

Proposed merger of and companies, could create a large diversified financial conglomerate. may get access to Shriram's customer base, but given divergent businesses, limited synergy / cross sell potential, deal rationale for SHTF is limited, in our view. With likely to be de-listed post deal, swap ratio would have to be favorable for Shriram Transport's shareholders, given SHTF may represent 40% of proforma loan book and 50% of proforma profits.

Also Read: IDFC-Shriram merger under regulatory scanner over share price hike

HSBC

A three-way merger has never been attempted in the Indian financial space, coupled with the size, which would be the largest to date. We see at least three-five years in the integration process along with significant execution risks. Business models of all three entities are quite different so integrating them under one roof would be challenging. While segments and customers are not overlapping, synergies appear almost non-existent; most of Finance and customers belong to the economically backward segment. So this will not only make IDFCB’s business more risky, profitability and scaling up will be difficult. 

Also Read: Piramal Enterprises' bets on Shriram group pay off

Apart from the technical difficulties, our analysis shows that a merger would not be value accretive. With significant drag of regulatory ratios on Finance and balance sheet, their return on assets (ROA) could decline from ~1.8-2% to ~1%, similar to where Bank is currently. So, a potential merger is not likely to boost Bank’s profitability either, in our view.


RESEARCH

Strategically, the merger is in a right direction given Bank was struggling with execution and growth and Shriram group, with the current retail asset base of over Rs 1-lakh crore, had long term structural growth concern in absence of stable low cost liability franchise. However, there could be near-term challenges with respect to execution, regulatory approvals, capital allocations, holding company discount etc. that can weigh on stock price performance. We believe Bank would be relatively better placed while would be in a compromising position. However, a lot would depend on swap ratios finally agreed upon between both the groups.

First Published: Mon, July 10 2017. 09:14 IST
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