The Hindu Business Line : Stake sale in Reliance Cap arm seen positive

The acquisition of a 5 per cent stake in Reliance Capital Asset Management, a fully owned subsidiary of Reliance Capital, by institutional investor Eton Park for Rs 501 crore, may not have much strategic significance for the AMC, given the relatively small stake being divested at this juncture.

However, the value which this deal places on Reliance Capital’s asset management arm may be significant both for its own stock price and for that of other financial services companies that have a subsidiary dabbling in the asset management business. This is especially so in a scenario where the stock markets are increasingly willing to assign an “embedded value” to nascent businesses such as insurance or asset management that such firms carry in their books.

This particular deal values Reliance Capital Asset Management at about 13 per cent of its assets under management. Earlier acquisitions in the Indian mutual fund industry (for much larger strategic stakes) have happened at valuations of between 4 and 8 per cent of the target company’s assets.

Possible spin-offs

Though the valuation for such deals will inevitably vary from case to case based on factors such as the equity/debt mix of assets, this deal could have a positive spin-off on valuations of other financial services companies who have an asset management arm.

While ICICI Bank, HDFC and Kotak Mahindra Bank already have established subsidiaries in the mutual fund business, recently listed firms such as Motilal Oswal Securities, Edelweiss Capital and Religare also have plans to commence asset management operations in the near to medium term.