KKR, Goldman associates favour Max, HDFC deal

Three large minority shareholders, who hold a big chunk in Max Financial Services between them, are in favour of the three-way deal between Max Financial Services, Max India and HDFC Life Insurance.

These investors are likely to vote for the shareholder resolutions based largely on the commercial rationale of the deal that will create the largest private sector life insurer, despite strong opposition from proxy advisory firms.

Moneyline Portfolio investments, a vehicle of the private equity major KKR, Xenok Ltd and GS Mace Holdings, both associated with Wall Street giant Goldman Sachs, are supporting the share-swap deal, which has become controversial because of the Rs 850-crore non-compete fee payable to promoter entities, including Analjit Singh and his immediate family members.

Moneyline bought its 9.95 per cent stake in MFS in January. Investments of Xenok (9.02 per cent), a Cyprus-based subsidiary of GS Capital Partners VI Fund and GS Mace (6.44 per cent), a Mauritius-based sub account, are over five years old and were made into the undivided Max India.

Last month, Xenok and GS Mace offloaded around two per cent stake in Max India.  KKR did not respond to an email seeking comments. Goldman Sachs executives were not available for comment. An email seeking comments sent to Max spokesperson also did not elicit any response.

Sources said these institutions were convinced that the non-compete fee would pale into insignificance when compared to the value created by merged entity. “Non-compete fee is around 1 per cent of the market cap of the combined entity vis-à-vis a 70 per cent upside in the share price, so commercial implication is much smaller compared to the commercial upside,” said a person familiar with the deal. Investors are also looking at revenue and cost synergies that could further enhance shareholder value.

However, proxy advisory firms are not convinced. Institutional Investor Advisory Services (IiAS) and Stakeholders Empowerment Services have released voting recommendations asking shareholders to vote against the proposal to approve non-compete fee.  “After the merger, the promoters of Max Life will continue to hold 6.5 per cent stake in the merged entity. The large stake by itself should act as a deterrent for the promoters from starting competing firms. Therefore, the rationale for paying non-compete fee in such a situation is unclear,” IiAS said. According to IiAS calculations, the promoter receives over Rs 100 per share in addition to the shares of the combined entity, which was a 21 per cent premium over returns of non-promoter shareholders.

In its recommendation to vote against, SES said “Although it is the business acumen of promoters and the management to take business to new heights, it is the shareholders/investors who have invested in these companies and supported the businesses for years. The non-compete being paid only to the promoter group is unfair to the shareholders.” It wondered how Singh and family claim sole credit for success of Max. “As per concept of corporation, it is the board which provides direction and it is management which implements directives of the board. How can the whole credit be given to an individual? This appears to be contrary to concepts of corporate democracy and collective responsibility. The credit of success goes to all stakeholders and how can all others be excluded from non-compete fees?” SES asked.

The non-compete agreement seeks to compensate Singh and associated entities for restrictions to carry out life insurance, distribution, reinsurance and pension businesses, his directorships and even financial investments in competing entities, directly or indirectly. The promoters would not be promoters of the merged entity and would not have any board seats.  

The resolution by Max Financial for approval of payment of non-payment fee is open for e-voting till September 24. While these three investors together account for over 25.4 per cent, the resolution would need more investors to either support or abstain from voting as it requires majority of minority investors approval for going through. Being a related party transaction, promoters, who hold 30.5 per cent, are not voting.  The cut-off therefore is 35 per cent.

Other large minority shareholders are IFC (3.1 per cent), Reliance Capital (2.2 per cent), ICICI Prudential Value discovery fund (1.7 per cent), New York Life (1.3 per cent), Government pension fund (1.2 per cent) and Motilal Oswal Most focused Multicap (1.2 per cent). About 45,000 small shareholders hold around 6.5 per cent.