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HDFC Life may lose out on share premium if it lists without Max Life

LiveMint logoLiveMint 29-05-2017 Anirudh Laskar

Mumbai: HDFC Life Insurance Co. Ltd may see a reduction in the premium for its shares if it chooses to go ahead with a listing before the completion of its proposed merger with Max Life Insurance Co. Ltd, experts said.

The firm may seek such a listing after the deal with Max ran into regulatory hurdles, said two people with direct knowledge of the development.

“Investors need clarity before investing in any company, and if HDFC Life or Max Life plan to list alone without providing clarity on the merger or about a new merger structure, the company will take a hit on the valuation and it won’t get the fair price or the premium expected,” said Santosh Singh, head of research at Haitong Securities.

Emails sent to HDFC Life and Max Life on Friday remained unanswered.

In August, HDFC Life and Max Life agreed to merge in a transaction that would create India’s largest life insurer, with assets worth at least Rs1.3 trillion, overtaking ICICI Prudential Life Insurance Co. Ltd.

The two companies had expected to secure the required approvals for the proposed merger from the Insurance Regulatory and Development Authority of India (Irdai) and other regulators before 30 June.

However, the proposal faced questions at Irdai over its compliance with existing merger regulations governing insurance firms in India. To get a better interpretation of the norms governing the deal, Irdai first sent the proposal to the office of the solicitor general, whose response was negative. Irdai then sent the file to the law ministry, which, in turn, sought the attorney general’s opinion.

On Wednesday, attorney general Mukul Rohatgi responded to the law ministry, saying he doesn’t wish to comment on the legality of the deal’s structure.

The law ministry is expected to convey its independent opinion to Irdai in the coming weeks. Whether the transaction, the first of its kind in the insurance sector, goes ahead will depend on the final call taken by Irdai.

If HDFC Life is listed before the merger, it may get a valuation similar to its only listed peer ICICI Prudential Life Insurance, which trades at a market cap to embedded value of 3 to 3.5 times. Since HDFC Life has an embedded value of around Rs12,300 crore, it may end up getting a market capitalization of around Rs31,000-37,000 crore, far lower than what the company would have commanded as a merged entity, said analysts.

Then, HDFC Life’s initial public offer (IPO) valuation will be much lower than the derived valuation, when the merger structure was announced in August. The deal structure had valued HDFC Life at 4.5 times its embedded value and the merged entity at 4.2 times.

Even if one considers the three-month average of Max Financial’s share price (which would reflect the news of the merger), the derived value for HDFC Life comes to Rs51,656 crore, or about 4.2 times its latest embedded value. This assumes that swap ratios announced at the time of the merger remain the same and HDFC Life shareholders own 69% of the merged entity.

“It makes immense sense to merge the business first and only then get listed, either automatically or through a separate application. The announcement of the deal is almost completing a year and investors have started seeing HDFC Life and Max Life as one company,” the head of a large domestic investment banking firm said on condition of anonymity. “They all are waiting and excited to see their company becoming the largest in the industry. If at this stage HDFC Life indeed goes with the option to list itself, the market’s excitement will die, which may affect the public issue pricing also.”

Under the proposed three-step merger process, Max Life is to first combine with its listed parent, Max Financial Services Ltd. In the next stage, the insurance unit will be demerged from this entity into HDFC Life. Finally, the non-insurance businesses of Max Financial will merge into group company Max India Ltd. That will result in the extinction of Max Financial and automatic listing of HDFC Life.

Irda’s reservations stem from an interpretation of Section 35 of the Insurance Act, which pertains to the first stage of the merger process.

Still, a listing, with or without the merger, will not only fulfil HDFC Life’s long-standing ambition of accessing public capital but may also simplify the proposed merger with Max Life. One of the main reasons for structuring the deal as a three-step process was to get HDFC Life listed automatically after the completion of the merger.

If HDFC Life chooses to get listed without Max Life in it, the merger will only require one step – directly amalgamating Max Life with HDFC Life, albeit with a share swap ratio that could be a little different.

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