Five sets of shareholders will be impacted if the mega IDFC Group and Shriram Group merger does take place. Not all of them may stand to gain from the merger, the preliminary design of which was shared on July 8. While the exact contours are yet to be worked out, it is bound to be complex and layered.
Shriram Group's holding company, the unlisted Shriram Capital Ltd. will be merged with listed entity IDFC Ltd., which will also house Shriram Group's insurance business.
Shriram Transport Finance Company Ltd. which houses the commercial vehicle loans division will also become an unlisted subsidiary of IDFC, once the merger is complete.
Shriram City Union Finance Ltd. a listed consumer finance company will be merged with IDFC Bank Ltd. Four listed entities in all are involved in the merger.
And then there's Piramal Enterprises Ltd., a public listed healthcare and financial services company promoted by Ajay Piramal, which owns 20 percent in Shriram Capital, 10 percent in Shriram City Union Finance and 10 percent in Shriram Transport Finance.
Based on conversation with equity analysts and market experts, here is the likely impact on each of these five listed companies and their shareholders.
IDFC Shareholders
Shriram Capital will merge into IDFC as will Shriram Group's insurance businesses. And Shriram Transport will become IDFC's unlisted subsidiary.
Reserve Bank of India does not permit two lending businesses under one holding company but parties to the deal suggest that permission have been given for monoline subsidiaries (conducting just one type of lending). So it's not clear if such a subsidiarisation of Shriram Transport by IDFC will be permitted.
Shriram Transport Finance will be allowed to operate outside IDFC Bank, as a monoline business and the bank will not enter the transport finance business, said Rajiv Lall, the chief executive officer and managing director of IDFC Bank, during an analyst conference call on Monday.
Shriram Transport may attract a holding company discount, if the company was to be merged with IDFC, as it will hold stake in the latter.
Shriram Transport Finance Shareholders
Its shareholders will get IDFC shares in exchange due to the proposed delisting and subsidiarisation plan.
Those shareholders who were keen on investing in a pure play transport finance business may not want to stay invested in IDFC with its larger mix of businesses. Others may appreciate a hedge to the cyclicality of the transport business.
Delisting may happen via a merger scheme and not the the traditional delisting route. Shriram Transport Finance's shareholder may be deprived of better price discovery and the resultant premium that a reverse book built process usually provides.
Shriram Transport enjoys a much higher valuation multiple than IDFC and this will get reduced due to a merger of the two.
IDFC Bank Shareholders
IDFC Bank's merger with Shriram City Union will give it critical exposure to retail customers, a strength that the bank currently sorely lacks.
The merger will reduce IDFC's holding in the bank (as stipulated by RBI) without much dilution. The final structure, though, will be known only after the swap ratio has been announced.
Shriram City Union Shareholders
Shriram City Union shareholders will get shares of IDFC Bank as a result of a merger.
This will give them exposure to wider mix of businesses than just retail lending. Though that may not be what they wanted when buying Shriram City Union's shares.
Retail lending is a higher growth business than institutional lending, which dominates IDFC Bank's loan book.
Shriram City Union is valued at a higher multiple of 3.16 times price-to-book value versus IDFC Bank's 1.50 times.
Piramal Enterprises Shareholders
This deal gives Piramal Enterprises, through its direct and indirect stake in IDFC Bank, an exposure to banking, limited to an up to 10 percent stake as per RBI regulations. So far the RBI hasn't been in favour of business houses entering the banking sector.
Piramal Enterprises' share price will be impacted due to its stake in the two listed Shriram companies and their unlisted parent Shriram Capital.
90 Days To Go
Both groups have signed a 90-day exclusivity agreement to continue merger talks. At the end of which there may or may not be a deal to be had, or a very different one from the one discussed so far.
Even if the deal structure stays the same, answers to many questions are yet not available.
- Swap ratios are yet to be determined. They may or may not compensate for some of the negatives that certain shareholders face.
- Who will run this conglomerate? IDFC's Rajiv Lall or Shriram's R Thyagarajan? Or will Ajay Piramal also be involved?
- The IDFC and Shriram brands will co-exist. Will they help maintain customer loyalty, especially for Shriram's retail customers or will it lead to confusion?
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