IDFC-Shriram merger called off on differences over swap ratio

We never got a formal counter-offer, presumably, because their set of shareholders could not get comfortable with our ask, said Rajiv Lall

IDFC Group and Shriram Group have called off their talks for a merger after failing to agree on a swap ratio. The two parties had, on July 8, entered into a 90-day agreement to evaluate a strategic combination of their relevant financial services. With no finality in sight, the parties had extended talks by a month till early November.

“Despite best efforts the two groups have not been able to reach an agreement on a mutually acceptable swap ratio. As a consequence, the exclusivity period stands terminated with immediate effect,” IDFC informed the stock exchanges.

Shriram City Union Finance and Shriram Transport Finance also issued statements saying, “Despite best efforts by both Shriram and IDFC, we could not reach common ground and arrive at a mutually acceptable structure and valuation.” Both parties had agreed to terminate any further discussions on the proposed potential combination, the statement added.  

Rajiv Lall, founder managing director and chief executive officer of IDFC Bank, said, “We were actually very confident of carrying the majority of our shareholders at a valuation that we believe was reasonable and fair. We made an offer to Shriram Capital shareholders, but we did not receive a formal counter-offer from the Shriram group.” Lall believes it probably was because Shriram shareholders were not comfortable with IDFC’s offer. Shriram group officials did not respond to Business Standard’s queries.

The proposal involved Shriram City Union Finance and the group’s retail operation being merged with IDFC Bank and Shriram Transport Finance delisting to become a wholly owned subsidiary of IDFC. 

Two insurance companies from the Shriram stable were also to be brought into the IDFC fold.

IDFC Bank in a statement said while focusing on enhancing its strategic momentum, it would continue to explore opportunities for inorganic growth. The bank had, in July 2016, acquired the south-based Grama Vidiyal Microfinance for an undisclosed amount.

Elaborating on the rationale for considering mergers and acquisitions, Lall said, “IDFC Bank has legacy burden that creates a drag on its profit and loss statement for two reasons. There are stressed assets, which impact the pre-tax profit to the tune of Rs 175 crore a year. We also have Rs 36,000 crore of fixed rate bonds with coupons of 8-9 per cent that have migrated from the infrastructure company to the bank.” The pre-tax impact of these bonds is about Rs 350-400 crore. 

Both are adversely impacting the return on assets (RoA) and return on equity (RoE). “The only way I get superior RoAs and RoEs is to grow out of this problem. We believe that by FY21, this RoA drag would be coming down from 35 basis points to under 10 basis points. But it will take me three to three-and-a-half years to grow out of my legacy challenges. If I can cut this journey from six years down to three through inorganic growth, it’s not a bad thing,” he said.

IDFC Bank’s strategy is to expand its retail business and diversify its corporate business beyond its traditional infrastructure focus. Over the past 24 months, IDFC Bank has developed a diversified retail asset portfolio of Rs 18,000 crore. By the end of 2017-18, excluding infrastructure, the bank would have a corporate loan book of over Rs 20,000 crore, it said.

The announcements were made after the markets closed. Shares of IDFC Bank declined 1.8 per cent to Rs 55.95 and IDFC lost 2.7 per cent to Rs 61.70. Shriram Transport Finance gained 1.8 per cent to Rs 1,180.40, while Shriram City Union Finance was up 1.9 per cent to Rs 2,186.25 on the Bombay Stock Exchange.

Bankers said it was a setback for both groups. While the Shriram group has a strong franchise and network, IDFC’s plans to garner retail presence will get delayed. 

IDFC has certain strengths to fall back on, such as a strong management team, comfortable capital base, and diversification of business mix and revenue streams, they said. However, attracting retail customers would be a cost-intensive and time-consuming proposition for the private lender. It continues to remain largely a wholesale borrowing and lending institution and is likely to remain so in the near term. Lall said the bank’s retail loan book, which was zero two years ago, stood at Rs 5,000 crore in September 2017. 

The bank, with two years of presence, has a small share of low-cost deposits - current and savings accounts (CASA) — which moved up from 7.8 per cent of total deposits in September 2016 to 8.2 per cent in September 2017. Currently, liquidity is good in the system and the bank could use this for strengthening its liability profile, said another banker.
 

(With inputs from T E Narasimhan)