Merger with Shriram: Holding firm discount could hurt IDFC shareholders

Holding company discount could mar shareholder value of IDFC if it went ahead with a merger deal with Shriram City Union Finance (SCUF) in the proposed manner.

Anil Singhvi, former CEO, Ambuja Cement, and Founder, IiAS, a proxy advisory firm, says government of India which owns a 16.38 per cent stake in IDFC could suffer the most if IDFC went ahead with the deal as proposed.

IDFC Group and Shriram Group have entered into an exclusivity agreement (for 90 days) to evaluate a merger of certain financial services businesses in the Shriram Group with the IDFC Group. Under the proposed structure, IDFC would remain the holding company, SCUF would be merged with IDFC Bank and Shriram Transport Finance Company (STFC) would be an unlisted fully-owned subsidiary of IDFC.

In India, most listed holding companies are quoting at a 30-70 per cent discount and IDFC being the holding company of its group suffers the same fate. Therefore, in a merger deal the dilution of IDFC shareholders will be more.

Holding companies usually trade at a discount as they primarily derive their income from investment in other assets and very little or no operating income. “The originally proposed structure is a value destroyer for IDFC shareholders as it dilutes them more than 85 per cent,” said Singhvi. “But if the merger is between two holding companies, i.e. IDFC and Shriram Capital, and valuations are done on fair value basis without holding company discount, it’s a win-win for all. I do hope finally the structure will be a value greater for all, including government of India which owns about 16 per cent of IDFC shares.”

Another issue is that Shriram Capital, which is the holding company of SCUF, and STFC is unlisted and hence, does not suffer from holding company discount. Since the whole of Shriram Capital is likely to be absorbed by IDFC Bank, experts say the valuation metrics for both holding companies should be similar as otherwise it could hurt IDFC shareholders.

Shriram Employee Trust, Piramal Group and Sanlam Group, which are currently large shareholders in Shriram Capital, could become the largest holders in IDFC and drive the business in future.

When contacted, IDFC said it did not want to comment on the issue. But a source close to the bank said it is likely that the deal structure could be re-worked.

Assuming the merger happens at current prices, IDFC Financial Holding’s stake in IDFC Bank will drop to 30.3 per cent from 52.9 per cent and Shriram Capital will hold a 14.4 per cent. Since the whole of Shriram Capital is planned to be absorbed within IDFC, the combined shareholding of IDFC Financial Holding in IDFC Bank will be 44.7 per cent, experts said.

COMMENT NOW