Mumbai: Reliance Industries Ltd (RIL) will acquire a controlling stake in two insurance companies—Bharti AXA Life Insurance Co. Ltd and Bharti AXA General Insurance Co. Ltd—from Bharti Enterprises Ltd, the telecom-to-retail conglomerate, the company said on Friday.
The deal marks the entry of India’s largest company by market value, led by Mukesh Ambani, into yet another business controlled by younger brother Anil Ambani’s Reliance Group, namely life and general insurance. This follows the termination of a five-year-old non-compete pact in May 2010 that barred the Ambani brothers from entering each others’ areas of business.
RIL and associate firm, Reliance Industrial Infrastructure Ltd (RIIL), will acquire the 74% stake held by Bharti in the two companies, it said in a statement issued on Friday after market hours.
RIL fell 1.06% to Rs 944 on the Bombay Stock Exchange on Friday. The bourse’s benchmark Sensex lost 0.63% to close at 18,268.54 points.
Bharti’s current partner in its insurance venture, French insurer AXA Group, will continue running the operations of the two ventures with its 26% stake in both. Foreign insurers can’t hold more than that in a local insurance firm.
On completion of the transaction, RIL and RIIL will hold 57% and 17%, respectively, in the two entities.
“RIL and AXA will join forces to create market-leading life and general insurance businesses in India by leveraging their respective strengths and expertise,” the statement said.
The statement was silent on the consideration it was paying Bharti. The transaction is “subject to negotiation” and the parties are yet to enter into legally binding agreements, it said.
Also, the deal can be consummated only after getting necessary approvals from the Insurance Regulatory and Development Authority (Irda).
In March, Reliance Life Insurance Co. Ltd, the life insurance business of Reliance Capital Ltd—Anil Ambani’s financial services arm—sold a 26% stake to Japanese insurer Nippon Life Insurance Co. for Rs 3,062 crore.
According to an investment banker who tracks financial services, the valuations that the promoters of Bharti AXA command may be at a significant discount to the money they have pumped in, considering the company could not scale up the business. “The valuation has to be beyond net worth as the group pumped money in procuring the business, as it starts giving return on investments only long term,” the banker said. He did not want to be identified.
The deal allows AXA to hike its stake in the two insurance ventures as and when allowed by Indian regulations governing foreign direct investment, the statement says.
“The proposed agreement contemplates an option by which AXA would acquire from RIL and RIIL up to 24% shareholding in both the insurance companies,” the statement said. “Upon exercise of such option, RIL will effectively own 45%, RIIL will effectively own 5% and AXA the balance 50% in both the insurance companies.”
S.P. Tulsian, an independent stock market analyst based in Mumbai who has tracked RIL since 1977, said the kind of “explosive growth” that the company was looking for in the next few years could come from businesses such as insurance.
“Insurance will give them good visibility and complements the existing retail business well,” he said. “Insurance is a very capital intensive business and RIL can deploy its surplus cash in growing the business with AXA.”
As on 31 March, RIL had cash and cash equivalents to the tune of Rs 42,393 crore.
This is RIL’s second tie-up in the financial services sector. It signed a deal with the US-based investment and technology development firm DE Shaw and Co. LP on 27 March to float an equal joint venture offering financial services to institutional and retail clients.
A 22 February HSBC Securities and Markets report estimates RIL will generate $22 billion (Rs 98,340 crore today) cash by fiscal 2012. Earlier this year, RIL signed a deal to offload a 30% stake in 23 oil and gas blocks operated by it to London-based oil and gas company BP Plc for $7.2 billion. Ambani expects that deal to be closed by March 2012.
Bharti has been looking to exit its investments in financial services businesses such as insurance and mutual funds. The stake sale in the insurance business does not come as a surprise to senior executives.
“They did not understand the financial services business well. Bharti’s strategy is short-term as against the very nature of insurance business,” said a senior executive of one of the Bharti AXA joint ventures, requesting anonymity.
“The group could not understand the capital intensive nature of life and general insurance business, and failed to scale it to the desired size in the last four years it has been in operations,” he added.
According to Irda data, as on 31 March, Bharti AXA ranked 20th among 23 life insurance companies in India, including state-owned Life Insurance Corp. of India, with collections of Rs 362.4 crore of new business premiums.
Compared with newer entrants in market such as Star Union Dai-ichi Life Insurance Co. Ltd and Future Generali India Life Insurance Co. Ltd, Bharti AXA has not been able to scale up operations.
In the general insurance business, the company ranked 15th among 19 general insurance firms with a gross written premium of Rs 551.48 crore.
The Bharti AXA executive said the group is now likely to focus on its core businesses such as telecom and retail.
Another senior executive at Bharti AXA said RIL brings its credibility and goodwill to the table and this will help the insurance business grow. He too did not want to be identified. “There will not be any change in management. The board, however, will undergo changes,” he added.