Who gains and who loses in IDFC’s goodwill hunting?
There is no prize for guessing why the IDFC Group wants to merge with the Shriram Group. Rajiv Lal promoted IDFC Bank Ltd is a clear winner in the proposed three-tier merger plan of the two groups.
Under the plan, all operational entities under the Shriram Group will move under the IDFC umbrella, Shriram City Union Finance (SCUF) will be merged with IDFC Bank while the most valued company in the group: Shriram Transport Finance (STFC) will remain as a separate entity.
Once executed, the new entity will be IDFC Ltd at the top holding a combined insurance subsidiary, asset management arm, STFC and IDFC Bank.
IDFC Bank shareholders would see their stock’s value rise and valuations will begin reflecting the expansion. The bank currently trades at 1.3 times its estimated price to book value of 2016-17 earnings. IDFC Ltd would also see its valuation nudge up although this would largely depend on the share swap ratios yet to be worked out for the deal. The stock prices of both IDFC and its bank have hardly seen an impressive breakthrough and trade at a discount to sector peers.
But here is a nugget of caution for shareholders of IDFC Bank. The merged entity of IDFC Bank and Shriram City Union Finance will see the bank’s asset size soar. But neither have a liability book to match that. IDFC Bank’s struggle to garner deposits continues and how it will match the additional Rs23,000 crore of assets after the merger is anybody’s guess.
The pain of bringing the finance company in tune with banking laws would be considerable as well, especially as both are dealing with rising bad loans. Perhaps the wisest aspect of this deal is to keep STFC untouched. STFC is in a unique niche business of truck financing and holds nearly a quarter of the market share. Given that STFC’s assets under management is nearly Rs80,000 crore, IDFC Bank would choke if it swallows this behemoth. Further, in the words of Lal, combining STFC and IDFC Bank could end up violating regulatory norms on shareholding as it will result in greater dilution of IDFC’s stake.
This wisdom to keep STFC untouched is hoped to be shared by the regulator, too, although strict rules say any lending business that normally a bank can conduct must not be done through a separate entity within the group. While banks are known to finance trucks and fleets, STFC’s business is niche in its low-ticket and cash-intensive loans and analysts believe the Reserve Bank of India should not have any misgivings over keeping the company separate from the bank.
In this deal, shareholders of STFC do not stand to lose or gain as it would be unscathed.
The unlisted Shriram Capital, in which billionaire Ajay Piramal's company bought a 20% stake in 2014, is the real lever. The Shriram Trust owns 45% in the firm. Both the promoters will have to sweeten the deal to get the trust to sign on the dotted line. Piramal’s game to enter the banking industry seems to have finally come to fruition. For the merger to hit all the right notes with regulators, he will have to bring down his stake in SCUF and STFC. The stake in Shriram Capital could also be asked to be diluted considerably.
Besides the value of owning a bank, shareholders of the Shriram Group don’t seem to have any other benefits. It would take 90 days to know to what extent they are compensated.