India: HDFC Life-Max merger ratio likely at 10:24

Visual from HDFC website

The merger of Max Financial Services Ltd, its unit Max Life Insurance Co. Ltd and HDFC Life Insurance Co. Ltd will be an all-stock deal, said two people with direct knowledge of the matter. Under a two-step process recommended to the boards of the companies, Max Life will first get merged into Max Financial in a 1:1 share swap ratio. Then, shareholders of HDFC Life will get 24 shares of this expanded Max Financial for every 10 shares they hold, the people said, requesting anonymity as the deal is still in the works.

The share swap ratio will be considered by boards of Max Life and HDFC Life when they meet separately on Monday.

To be sure, the plan needs to be cleared by the respective boards, ratified by shareholders, and approved by a high court.

On 17 June, the Max companies, promoted by Analjit Singh, said they will merge with HDFC Life to create an insurance giant with Rs.1.1 trillion ($16.4 billion) in assets. The new company may be valued at upwards of Rs.45,000 crore ($6.7 billion), according to the people cited above. It would become India’s largest private sector life insurer, overtaking ICICI Prudential Life Insurance Co. Ltd.

“While the valuation of HDFC Life is worked out at around Rs.29,000 crore ($4.3 billion), the value of the combined value of the entity created through the merger of Max Life and Max Financial Services is pegged at around Rs.16,000 crore ($2.3 billion),” said the first of the two people.

Emails sent to HDFC Life and Max Life on Saturday remained unanswered while calls made to the top management were not returned.

Under the share swap agreement, existing shareholders of HDFC Life will own 68.66 per cent of the merged entity, while existing shareholders of Max Life and Max Financial will hold the remaining 31.34 per cent.

While Housing Development Finance Corp. Ltd (HDFC), promoter of HDFC Life, will hold 42.32 per cent of the new merged entity, UK-based Standard Life Plc will own 24.03 per cent.

Currently, HDFC holds 61.63 per cent in its insurance unit while Standard Life owns 35 per cent, according to the insurance company’s 2015-16 annual report.

Max Financial—in which Analjit Singh, his family and group firms hold a 30.45 per cent stake—owns 68 per cent of Max Life, according to regulatory filings. Foreign shareholders including Mitsui Sumitomo hold 25 per cent.

The stakes of promoters and existing public shareholders of Max Financial in the new entity will depend on the structure of Max Life’s merger with its parent. One option is that Max Financial, which holds a 68 per cent stake in Max Life, could get shares allotted of itself, i.e., treasury shares.

Another possibility is to allot shares directly to the shareholders of Max Financial—like what happened when IDFC Ltd shareholders were given shares in IDFC Bank.

This means that promoters and public shareholders of Max Financial will get additional shares in the firm, in proportion to their holding in Max Life.

In that case, the current promoters of Max Financial, which includes Analjit Singh and related entities, will own 6.86 per cent of the merged entity while its public shareholders will hold 15.68 per cent. “According to our calculations, the stock of Max Financial is pricing in a share swap of 1:2.1,” said Santosh Singh, head of research at Haitong Securities India Pvt. Ltd. “Anything more than that and we believe that the stock will react negatively.

The stock of Max Financial has gained 16.54 per cent on BSE since the merger was announced on 17 June, compared to a 5.45 per cent gain for the benchmark Sensex.

“There are synergies between the two entities, but markets will watch out for factors such as retaining of key people. These are asset-light businesses where the core team forms an essential part of the business and helps in building a credible franchise,” Singh added.

The two-step process “will enable HDFC Life to get listed automatically. The swap ratio will need both boards’ approvals and a court approval. After the boards of the companies approve the terms, the agreements will be submitted to the court,” said the first of the two people cited earlier.

“The court approval process will take up to nine months and after that, the listing process of HDFC will start. The total process till listing of HDFC Life may take up to a year,” this person.

“There have been intense negotiations on the shareholding pattern. That was the scene till last week. Given there will be a long weekend coming up, the pressure has to build up between both the parties to come to a conclusion,” said the second person. The 60-day mutually agreed upon exclusivity period ends on 15 August.

Last year, Max India underwent a three-way split and created Max Financial Services as the listed holding company for the insurance business of Max Life. Following the demerger, Analjit Singh sold a 9.5 per cent stake in Max Financial Services to private equity firm KKR.

At present, a majority of HDFC Life’s product portfolio consists of unit-linked insurance products (Ulips), while traditional life insurance products contribute the most to Max Life’s portfolio.

If the merger goes through, it may trigger a long-awaited consolidation in the industry, which has assets under management of Rs.22.4 trillion ($335 billion), of which the share of India’s 23 private sector insurers is only about Rs.4.61 trillion ($69 billion), according to the Insurance Regulatory and Development Authority of India.

HDFC Life, the third largest private life insurance company in terms of first-year premiums, collected a total first-year premium of Rs.6,488 crore ($971 million)  in the year ended 31 March.

In the same fiscal, Max Life collected a total first-year premium of Rs.2,882 crore ($431 million). HDFC Life posted a net profit of Rs.818 crore ($122 million) and Max Life Rs.439.1 crore ($65 million) in the year ended 31 March.

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This story was first published livemint.com

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In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

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  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
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