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IDFC-Shriram Deal Is A Lose-Lose For All Shareholders, Says Anil Singhvi

IDFC Bank was itself a mistake says Anil Singhvi in this critique of the IDFC - Shriram deal.



(Source: BloombergQuint)
(Source: BloombergQuint)

There is little about the proposed merger of IDFC Ltd., IDFC Bank Ltd. and the three Shriram Group companies that Anil Singhvi approves of.

The former chief executive officer of Ambuja Cement and now a well known corporate governance commentator, Singhvi listed several flaws in the deal during an extensive chat with BloombergQuint’s Menaka Doshi and Ira Dugal.

The Shriram Group holding company, Shriram Capital Ltd. is to merge into IDFC.

IDFC Bank Was A “Mistake”

IDFC was a non banking financial services company until a bank was carved out of it. Which according to me was a big mistake to begin with. They shouldn’t have made a bank out of a NBFC without realising that this bank cannot stand on its own two legs.

Singhvi argues that the merger is one of “disparate and desperate” groups. His criticism is that IDFC Bank has not made much progress as a bank in the almost two years of its operations and hence its creation has been of no benefit to IDFC shareholders.

Singhvi points to the current share prices of the parent and its banking subsidiary and the discount their combined value trades at versus the pre-merger price, to make his case.

IDFC’s shares traded at around Rs 150 a piece on July 3, 2015. Two years later, on July 3, 2017 the IDFC share traded at Rs 54 and IDFC Bank at Rs 55.

IDFC Bank has really not been able to become a retail bank. Because it lacks the DNA of a retail bank.

Shriram Merger “Foolhardy” And “Naive”

The acquisition of a retail business is a “huge risk, argues Singhvi as he questions IDFC Bank’s inability to shore up retail deposits. Its CASA or current account and savings account ratio is 5.2, among the lowest in private sector banks.

In merging with Shriram City Union Finance Ltd., a public listed consumer finance company, IDFC Bank hopes to add a Rs 23,000 crore loan book.

It’s foolhardy to say I’m acquiring all these customers and they will open accounts with me and I will having savings and current account balances coming to me. That is naive.

"Sell The Bank”

In the absence of other readily available and acquirable retail lending and deposit businesses what should IDFC Bank do?

Singhvi offers a radical solution.

Get sold to another bank. That’s the only answer. Don’t try to do something stupid as this, that I will acquire. You don’t have the DNA of being a bank. You made a mistake in 2015, please rectify it. Get sold to another bank. Or else let IDFC merge with IDFC Bank. At least the holding company discount will go away.

Weak Acquisition Currency

Singhvi also expresses concerns about potential deal valuations and what they will mean for shareholders of the two IDFC companies. His grouse is that shares of both IDFC and IDFC Bank are currently trading at lower multiples than their peers.

IDFC Bank trades at 1-1.5 times its book, the lowest among listed banks. Singhvi puts IDFC’s sum of parts value at Rs 100, though the share price trades between Rs 50-60 due to a holding company discount.

Both make for poor acquisition currency believes Singhvi.

When I have a currency which is such a weak currency should I be an acquirer? According to me IDFC Bank should be an acquiree than acquirer. It should be acquired by another bank to merge and kill all these situations. 

Shriram Shareholders No Better Off

Singhvi, who is the founder of proxy advisory firm IiAS, also questions the proposed merger structure that may require Shriram Transport Finance Company Ltd. to become a subsidiary of IDFC, an unlisted one at that. Merging it with IDFC Bank will dilute IDFC’s shareholding in the bank to below the 40 percent threshold mandated by RBI.

As a Shriram Transport Finance shareholder why would I agree on becoming a shareholder of IDFC which is suffering a 30-50 percent holding company discount. Today as I look at it the book value or sum of parts value at IDFC is Rs 100, but the share is trading at Rs 50-60. Why would I want to have IDFC shares?

I don’t know who is acquiring who he says, responding with sarcasm to a question regarding management of the merged entities. He reiterates the point that both Shriram companies are larger than their IDFC counterparts and that the brand in use should be Shriram IDFC, not IDFC Shriram. All this has yet to be finalised in the 90-day exclusivity period both sides have agreed to.

If the deal does get done, Singhvi insists “all four sets of shareholders will lose”.