Axis Bank Ltd. agreed to increase its stake in Max Life Insurance Company Ltd. to 30 percent, removing a key stock overhang and providing a potential boost to the valuations of the insurer.
India's third-largest private lender will buy 29 percent stake from Max Financial Services Ltd. in its insurance arm, according to their filings. The insurer's parent will hold 70 percent.
Mitsui Sumitomo Insurance, which owns 25.5 percent, will swap its 20.6 percent in Max Life for a 21.9 percent stake in Max Financial Services, which will buy the rest of the Japanese partner's stake.
The companies didn't disclose the financial details. Axis Bank and Max Financial signed a confidentiality agreement in February to explore the possibility of long-term partnership. The deal is subject to requisite corporate and regulatory approvals.
Here's how Max Financial Services and its insurance joint venture stand to gain.
Removes Key Overhang For Stock
Axis Bank is one of the key bancassurance partners for Max Life, contributing around 55 percent to the insurer's premium in the nine months ended December, according to its disclosures. Max Life's bancassurance channel grew 18 percent in 2018-19, led by a 15 percent growth from Axis Bank.
This tie-up was due for renewal in September and Axis Bank had started selling Bajaj Allianz Life Insurance Company Ltd.'s plans as well. That triggered uncertainty among Max Financial investors about the extension of the tie-up.
The deal signals the partnership will continue, removing the overhang for the stock.
Apart from Axis Bank, Max Life also has tie-ups with Yes Bank Ltd., Lakshmi Vilas Bank Ltd. and multiple urban co-operative banks.
Potential Valuation Boost
Max Financial Services trades at its embedded value, making it the cheapest among private life insurance peers, according to an April 20 report by UBS.
Analysts have yet to release their forecasts after the deal, but UBS and Investec said earlier that such a transaction would aid valuations of Max Financial.
A purchase of stake in Max Life by Axis Bank should lower impact of open architecture—where a bank ties up with multiple insurers, UBS had said in a January note. Even a distribution agreement would imply a decent upside for the stock of Max Financial, the brokerage had said, estimating that its valuation could double to 2.1 times its estimated embedded value in FY21.
Investec, in a February note, estimated the valuation to jump to 3x after the deal. At these valuations, it said, Max Life should command a value of Rs 34,000 crore.
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