Home / Companies / News /  A cloud of valuation hangs over Shriram group

The proposed merger of Shriram Group companies may lead to value erosion for public shareholders of group companies since the stock swap ratio favours the unlisted holding company, three investment bankers aware of the deal said.

The share-swap ratio doesn’t factor in the core investment company discount for Shriram Capital Ltd (SCL) and the rating downgrade of the merged entity if the promoters’ shareholding drops below 26%, the bankers said on condition of anonymity.

After an initial euphoria following the deal’s announcement on Monday, shares of Shriram Transport Finance Co. Ltd (STFC) and Shriram City Union Finance Ltd (SCUF) tumbled on exchanges. The investment bankers blame the deal structure for the sharp plunge in shares.

STFC shares have dropped 9.72% since the deal was announced, while SCUF fell 9.12%. On Thursday, the STFC stock fell 1.81% to 1,332.75 on BSE, while SCUF shares lost 1.62% to close at 1,948.05.

The proposed merger, which needs shareholders’ approval, will result in the promoter stake falling to around 15-16%, making the group vulnerable to credit rating downgrades, one of the three people said, requesting anonymity.

Typically, any steep fall in promoter holdings in shadow lenders, especially below 26%, negatively impacts their credit rating.

“The rating downgrade will increase the borrowing cost for the merged entity and therefore affect the net interest margin of the financier. In addition, it will get even tougher for the merged entity to increase or offer any decent lending rate because the group primarily caters to underserved borrowers," the person said.

According to the merger proposal, SCL will merge two of its listed affiliates, STFC and SCUF, with itself.

Shriram Subramanian, managing director of proxy advisory firm Ingovern Research Services Pvt. Ltd, said, “In any merger of a holding company with its associates, a holding company discount is applied while pricing the deal or arriving at the share-swap ratio. In this particular merger, the required holding company discount, which should be 30-40%, has not been applied. This means the deal is biased more in favour of SCL rather than STFC and SCUF shareholders. Also, post the merger, the promoter holding will go down to 20.1%, which is below the critical threshold of 26%. This, too, could have been factored in while pricing the companies and evaluating the final merged entity."

The merger appears to be designed to provide an exit to Piramal Group and other private equity investors in SCL, said the chief executive of another proxy advisory firm, seeking anonymity. “It’s clear there is not much synergy cost-wise, and that’s why the stocks are bound to correct further until they hit a level where the proposed swap structure is justified," the proxy advisory head said.

A Shriram Group spokesperson said: “SCL is a core investment company and, hence, there is no business other than investment in that entity. SCL is merely an investment vehicle, unlike a Bajaj Finserve/Tata Sons / L&T, etc., which have other businesses as a holding company. As regards dividend, the regulation requires a statutory reserve of 20% when paid out and considering the merger of SCL, the same will not apply to SCL. But the same will continue to apply to the promoter entity namely SFVPL in which there is no change. The valuation does not result in any fallout or loss to shareholders of STFC considering neither the number of shares nor the economic value is depleted considering the merger of SCL into STFC. The company has also engaged external credible parties for the valuation exercise and fairness opinion for the entire process."

Emails sent to spokespeople for Piramal Enterprises and TPG remained unanswered.

SCL, through its affiliates, manage assets of at least 21.65 million people, with 67,000 employees across 4,000 branches. The company posted a net profit of 4,900 crore in FY21 and has assets under management of over 2 trillion as of September end.

According to the people cited above, the merger may only help Piramal Enterprises and TPG Capital get an easier exit since most of their shares are now held in the unlisted holding company. Piramal owns a 20% stake in SCL and 10% in SCUF. TPG Capital holds a 9.4% stake in SCL, while South Africa’s Sanlam Group owns 26% and Shriram Ownership Trust and Shriwell Trust hold 30.7% and 13.4%, respectively, in SCL.

The merged entity will have combined assets under management of at least 1.5 trillion and a distribution network of over 3,500 branches. “Since STFC and SCUF are not subsidiaries but just affiliates of Shriram Capital, dividend distribution tax was effectively 40% (paid at two levels), and that’s why in the current structure of the deal, this discount needs to be factored in. If this holding company discount is factored in, the valuation of the final merged entity should be around 18,500 crore instead of 29,700 crore as derived from the swap ratio in the proposed merger deal," said the second person.

According to the merger proposal, STFC will issue 1.55 shares for every share of SCUF and 0.09783305 share for every share of SCL. This translates into SCL shareholders getting a share of STFC for every share held in STFC and 1.55 STFC shares for SCUF.

According to the three investment bankers, the share-swap structure assigns an expensive valuation to SCL because the two publicly traded companies it is merging with are affiliates. Had STFC and SCUF been subsidiaries of Shriram Capital, the dividend distribution tax would have to be paid only once instead of twice, as is the case


Anirudh Laskar

Anirudh Laskar is a senior editor at Mint, with 17 years of experience. He has reported on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the financial services industry. Based out of Mint’s Mumbai bureau, Anirudh has worked with Business Standard and The Telegraph before joining Mint in 2009.
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