Merger concerns hit Shriram, IDFC shares
Mumbai: Shares of Shriram and IDFC group on Monday fell after brokerages termed the merger between the groups as negative amid concerns of regulatory hurdles, integration challenges and the complexity of merging companies operating in multiple businesses. Shareholders of Shriram group firms are expected to suffer in particular from falling returns and a holding company discount.
Shriram Transport Finance Co. Ltd’s shares fell 3.3% to close at Rs1,054.35 while Shriram City Union Finance Ltd slipped 6.4% to Rs2,328.10. IDFC Ltd fell 5.7% while IDFC Bank Ltd gained 0.7%.
“We believe the final deal could potentially be complex given involvement of three large listed entities,” wrote Jefferies India analysts in a note to client on Monday. “We also see potential regulatory hurdles as there could be issues in having an NBFC and a bank under the same non-operative financial holding company.”
On Saturday, both groups announced exploratory merger talks to be discussed over a 90-day period. According to the proposed terms of merger, the retail consumer lending business of Shriram Capital, Shriram City Union Finance Ltd, will be merged with IDFC Bank, while Shriram Transport Finance Co. will continue to operate as a 100% subsidiary of IDFC Ltd and will be eventually delisted once the merger takes place.
The insurance business of Shriram will be transferred to IDFC Ltd, with IDFC holding close to 75% in both life and general insurance businesses.
For Shriram, there could be limited gains from the access to IDFC’s retail bank or wholesale franchise since their target segments are different, analysts said.
Shriram Transport Finance “has dominance in the niche pre-owned CV (commercial vehicle) financing market with its core customer base being under-banked small truck owner operators (low income) who transact on a cash basis”, wrote the Jefferies analyst.
Shriram Transport shareholders could also lose out since their shareholding will be subjected to a holding company discount after their shares are swapped with IDFCs and the firm delists. Besides, analysts also expect return ratios to go down.
To be sure, much depends on the swap ratios for the merger.
The swap ratio will have to adequately compensate for Shriram Transport becoming an unlisted entity and shareholders indirectly getting a mix of businesses versus a pure-play niche commercial vehicle financier, wrote Edelweiss Securities Ltd analysts in a 9 July note.