Does Max Financial benefit more from the merger?

Apart from swap ratio, non-compete fee to Max Financial promoters, use of 'Max' brand name and payment of royalty seem to give edge to Max Life

The mega-merger in the life insurance segment between Max Life and HDFC Life has moved a step ahead, with both announcing the finer contours of the deal on Monday evening. The Street was expecting fireworks from both stocks on Tuesday but after some pressure, they were each down by a little over 1.5 per cent.

Part of the decline could be attributed to the rally in both between June and August 8 — HDFC up to 10 per cent and Max Financial (promoter of Max Life) up 50 per cent. Also, some analysts question the merger’s valuations.

The shareholders of Max Financial Services will receive seven shares in the merged HDFC Life entity for every three shares they’d held, in lieu of the merger of the life insurance business run under Max Life. Analysts say the swap ratio of 2.33:1 appears a bit in favour of Max Life. “Prior to the likely merger, Max Life was trading at much lower valuations,” says Nitin Aggarwal of Antique Stock Broking. “This transaction is certainly a boost to its valuations.”

Among various reasons for a discount in the valuations to Max Life’s business, the key one was lack of stable banking channel partner. While Max Life recently struck a deal with Axis Bank for distribution of its products, this is valid for only five years ¤— though the bancassurance channel is opening, with banks allowed to sell insurance products of more than one insurer. While, HDFC Life has an established distribution banking partner, HDFC Bank. “It appears HDFC could have bargained for more from the merger,” says Siddharth Purohit of Angel Broking.   

Apart from the swap ratio, certain operational factors such as the non-compete fee to the promoters of Max Financial Services, use of the ‘Max’ brand name for seven years after the merger and payment of royalty fee for this seem to give more mileage to Max Life. “Having these softer aspects in its favour, I feel Max Life has gained more from the merger,” an analyst from a domestic brokerage said on condition of anonymity. “In fact, prior to the announcement of the merger in June, analysts were questioning why Max Life should command two times the embedded value. With this deal, the valuations jump to over three times, when nothing much has fundamentally changed.”

However, not all analysts share the view. Nidhesh Jain of Investec Securities says, “The gain in valuation of Max Life is due to multiple re-rating of its stock price since the announcement of the deal, rather than from the swap ratio itself.” According to his calculation, the swap ratio is at an 18 per cent discount to his expectations of an embedded value-neutral one. Edelweiss analysts also believe the ratio is somewhat in favour of HDFC Life.

Nevertheless, a section of analysts are also disappointed with the reverse merger route for listing HDFC’s life insurance business. They say the market would have appreciated an Initial Public Offer of equity from HDFC Life, rather than a reverse merger. “This would have helped us gauge the market appetite for an IPO in the insurance business and understand the price discovery for such businesses,” says Purohit.