IDFC-Shriram Group Call Off Merger Talks

The IDFC and Shriram Groups, on Monday, said that talks to merge group entities have been terminated as the two parties failed to agree on a share swap ratio for the proposed deal. In July, the two groups had entered into exclusive talks for a deal termed as a “marriage made in heaven” by Rajiv Lall, CEO of IDFC Bank Ltd.

Four months after discussions were initiated, IDFC Ltd. informed stock exchanges that discussions have been called off.

“This is to inform you that despite best efforts, IDFC Group and Shriram Group have not been able to reach common ground on a mutually acceptable swap ratio,” said the firm in its notice to stock exchanges. “Accordingly, both parties have agreed to call off discussions on a potential merger....,” it added.

Earlier in the day, Bloomberg News reported that key shareholders of IDFC were not happy with the proposed valuations. This was one hurdle for completion of the deal.

The Indian government is IDFC’s biggest shareholder with a 16.4 percent stake, while a unit of Malaysia’s sovereign wealth fund Khazanah Nasional Bhd. holds 9.5 percent, according to exchange filings. The biggest shareholders of IDFC Bank—other than IDFC, which owns a 52.8 percent stake—are the Indian government with a 7.7 percent stake and the Khazanah unit with 4.4 percent.

A Complex Deal

The idea behind the deal, as detailed by Ajay Piramal, chairman of Shriram Capital, in July, was to create a mass retail financial conglomerate.

The deal, however, was a complex one and was structured as follows:

• All operating businesses of both groups will come under IDFC
• Shriram City Union will be absorbed into bank
• Shriram Transport will remain as a standalone NBFC
• Shriram Transport will become a subsidiary of IDFC
• Life and general insurance businesses will also become subsidiaries of IDFC
• Shriram Transport Finance will be unlisted after the deal is completed

There were additional complexities. For instance, Piramal’s 20 percent stake in Shriram Capital, the holding company for the group. Piramal’s stake had to be adjusted in a manner that he did not hold more than the regulatory threshold of 5 percent in IDFC Bank.

Also the two groups had to convince the Reserve Bank of India (RBI) to allow them to hold the Shriram Transport Finance business outside the bank. While the RBI’s new banking licence guidelines say that businesses can be undertaken inside the bank should not be conducted through an outside entity, the regulator has allowed for exceptions in the past.

Finally, a swap ratio acceptable to shareholders of all four listed entities had to be agreed upon. This proved to be challenging.

“I think there were two things going on from the shareholder's side. One was that IDFC Ltd can not go below their 40 percent mark of shareholding (in the bank). So they could not give a preferable ratio to the Shriram Transport side of the business. And the Shriram Transport shareholders were also unhappy because they were not getting fair value in terms of the swap,” Pritesh Bumb, analyst at Prabhudas Lilladher, told BloombergQuint after the merger talks were called off.

What Next?

Shriram City Union Finance and Shriram Transport Finance are mature businesses and it will be “business as normal” for them, Bumb of Prabhudas Lilladher said, while adding that the failure of merger talks will be negative for IDFC Bank.

Launched in October 2015, IDFC Bank was one of two entities granted a licence in the last round of private bank licencing. The other one being Bandhan Bank. Unlike Bandhan Bank, which decided to stick to the core business which it had established as a micro-lender, IDFC Bank has tried to build a new identity.

At launch, IDFC Bank said it hoped to build a retail banking franchise driven by technology and also intended to focus on rural markets through its ‘Bharat Banking’ division.

The deal with the Shriram Group was expected to give IDFC Bank scale and help it expand its retail assets and liabilities base.With the deal called off, IDFC Bank will need to go back to the drawing board.

In a press release, IDFC Bank said its strategy to expand its retail business remains on track. The bank said that over the last 24 months it has developed a diversified retail asset portfolio of Rs 18,000 crore. Its base of CASA (current account and savings account) deposits and retail fixed deposits now stands at over Rs 7000 crore.

“IDFC Bank, while focusing on enhancing its strategic momentum, will continue to explore opportunities for inorganic growth as well,” the lender said in the release.

Ajay Bagga, executive chairman of OPC Asset Solutions, said that it’s too early to judge the bank.

“There will be other opportunities, there will be other networks available. In terms of buying out, there will be other buy options available. Second, IDFC has done a fantastic job on digitization. They have really not put down the money on a brick and mortar network. They have tried the digital route. I think the jury is still out,” Bagga told BloombergQuint.