L&T, Future Generali call off merger talks

Valuation issues couldn't be bridged even after 13 months; mutual decision to cancel the idea

A little over a year after agreeing to form a joint venture by combining their businesses, L&T General Insurance and Future Generali India Insurance have decided to call off the venture, due to 'inordinate delay' in finalising the transaction.

Sources indicate the deal was called off due to valuation issues. They said the transaction was valued at Rs 1,200 crore but the health of Future Generali - which made a profit of Rs 28.4 crore in the first nine months of 2013-14 - had significantly improved since the deal was announced, while L&T General's loss widened during the period.

"It has been decided not to proceed with the said transaction due to inordinate delay in finalising the transaction documents and obtaining permissions," said Future Retail, the parent company of Future Generali India.

In March 2013, heavy engineering major Larsen & Toubro (L&T), and Kishore Biyani's Future Group and Generali Group had signed a non-binding term sheet for the merger of L&T General Insurance and Future Generali India Insurance. This was a first of its kind merger proposed in the insurance sector.

After the merger, L&T was to hold 51 per cent stake, Generali Group 26 per cent stake and 23 per cent was to be held by the Future Group. This was subject to due-diligence from the parties, apart from approvals from the insurance regulator and other bodies.

At present, Future Generali is a joint venture between Future Group and Italy's Generali, in which the foreign partner holds a 25.5 per cent stake. Future Retail and Shendra Advisory Services hold the remaining 74.5 per cent stake.

"The parties have decided mutually to call off the discussions around the proposed joint venture. L&T General Insurance will continue its focus on expanding its business footprint in the areas of both general and health insurance," said L&T in a statement to the stock exchanges.

RECENT M&As IN INSURANCE

• 2011 Nippon Life buys 26 per cent in Reliance Life Insurance for Rs 3,062 crore
• April 2012 Japan’s Mitsui Sumitomo buys 26 per cent in Max New York Life for Rs 2,731 cr
• July 2012 Tata AIG rechristened TATA AIA, following exit of AIG from insurer AIA Group
• September 2012 Irda approves PNB’s move to buy 30 per cent in MetLife India Insurance
• January 2013 Exide Industries buys the remaining 50 per cent stake in ING Vysya Life Insurance for Rs 550 cr; ING exits venture
• March 2013 Pantaloon Retail signs pact with Industrial Investment Trust to sell 22.5 per cent in Future Generali India
• March 2013 L&T and Future Group sign non-binding term sheet for merger of L&T General Insurance and Future Generali India; L&T to hold 51 per cent, foreign partner 26 per cent
• July 2013 DLF to sell 74 per cent in DLF Pramerica Life Insurance to Dewan Housing Finance

Bankers close to the Future Group said L&T did not close the deal even after a year. Meanwhile, Future Generali India saw a turnaround and is expecting profit of Rs 200 crore next year. "We can at least look at a two-times higher valuation if we decide to sell later," said an official. Insurance sector sources said the deal had valued Future Generali India at around Rs 1,200 crore, which now looked on the lower side, since the company's books had improved.

Future Generali India, as mentioned earlier, posted a profit of Rs 28.4 crore during the April-December period of FY14 and hopes to end this financial year, FY15, with a gross written premium of Rs 1,300 crore. The company collected a premium of Rs 944 crore, up 10.4 per cent, during the first nine months of 2013-14 against Rs 855 crore in the same period a year before. Senior executives said it would make a profit in FY14, and break-even in this sixth year of operations. Usually, companies take about eight to 10 years to become profitable in the sector.

"Only a non-binding term sheet was signed by both the parties. Apart from shareholders raising some concerns over the deal's contours, there were some valuation gaps, due to which it was thought best to call it off," said an insurance executive privy to the agreement.

This deal was not only to be approved by the Insurance Regulatory and Development Authority; it might also have needed a court's nod and one from the competition commission.

L&T in the statement said L&T General Insurance earned a gross written premium of Rs 253 crore during 2013-14, growth of 39 per cent over the previous financial year, as against a sectoral growth of 12 per cent for the period. From the financial disclosures of L&T General Insurance, the company posted a net loss of Rs 83 crore for the April to December period in 2013 as compared to a Rs 66-crore loss for the same period in 2012.