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IDFC-Shriram merger in trouble over valuation

Ajay Piramal, chairman of Shriram Group. With Shriram Capital valued at Rs16,000 crore and IDFC’s market cap at Rs10,000 crore, IDFC shareholders will hold 38% stake in the merged entity while the rest will go to Shriram shareholders. Photo: Aniruddha Chowdhury/MintPremium
Ajay Piramal, chairman of Shriram Group. With Shriram Capital valued at Rs16,000 crore and IDFC’s market cap at Rs10,000 crore, IDFC shareholders will hold 38% stake in the merged entity while the rest will go to Shriram shareholders. Photo: Aniruddha Chowdhury/Mint

IDFC shareholders seek a share swap ratio so that they hold 45-50% of the entity resulting from the IDFC-Shriram merger, but such a valuation for IDFC may not be acceptable to Shriram shareholders since they will lose out

Mumbai: Differences over the valuation of IDFC Ltd have come in the way of its proposed merger with Shriram Group to create a financial services company with combined revenue of $4 billion, said three people aware of the development.

Shareholders of IDFC such as Enam Holdings Pvt. Ltd and Sipadan Investments (Mauritius) Ltd, a subsidiary of Malaysian sovereign wealth fund Khazanah Nasional Bhd, have demanded a higher valuation for the company, citing bright prospects for IDFC Bank Ltd and other subsidiaries, the people said on condition of anonymity.

IDFC and Shriram announced their merger plan on 8 July, agreeing on a 90-day exclusivity period for completing the due diligence process. The exclusivity period was later extended until 8 November.

Under a three-tiered structure, the retail arm Shriram City Union Finance Ltd was to be merged with IDFC Bank Ltd; Shriram Transport Finance would become a fully owned unit of IDFC and be delisted; and IDFC would also become the holding company for the Shriram Group’s insurance businesses.

According to the three people cited above, Shriram Capital has been valued at Rs16,000 crore. IDFC’s current market capitalization is around Rs10,000 crore. This would entail IDFC shareholders holding around a 38% stake in the merged entity, with Shriram shareholders owning the rest. Such a swap ratio would have diminished the holding of IDFC shareholders and was not acceptable to them, said one of the people cited earlier.

Some private institutional shareholders are lobbying the government, which has a 16.38% stake in IDFC, to push for a higher valuation for the financial services firm, said a second person.

According to a presentation made to the government, which has been reviewed by Mint, assigning values to IDFC’s individual subsidiaries such as IDFC Bank, the securities unit, private equity arm, asset management business and so on would value the firm at Rs104 per share, or Rs16,600 crore. The investment banker for the merger had valued IDFC at Rs58.50 per share, or Rs9,336 crore, according to one of the three people cited above who has direct knowledge of the deal.

Using the sum-of-the-parts value, IDFC shareholders have sought a share swap ratio that would ensure they hold 45-50% of the merged entity. The banker for the deal proposed a 38% holding for IDFC and 62% for Shriram Capital in the final merged entity.

“Using IDFC as a currency for merger, from an existing IDFC shareholder perspective is only feasible if it is valued at its fair value, else (it) will destroy value for its shareholders," the presentation said.

However, such a valuation for IDFC might not be acceptable to Shriram shareholders since they will lose out, said the first person cited earlier.

“What we know is that some shareholders of IDFC have demanded a much higher valuation... This is completely unreasonable and will prevent the deal from happening," said a director on the board of Shriram Transport Finance. He declined to be named.

“We cannot comment on any of this until our board meetings take place," said Rajiv Lall, managing director and chief executive officer, IDFC Bank.

“A deal is not done till it is done. In the meantime speculations abound. We are in discussions.... Wisdom demands that we wait and see," said R. Thyagarajan, co-founder of Shriram Group.

Emails sent to Enam and Sipadan were not answered.

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