IDFC-Shriram merger talks fail over valuation issue

IDFC Ltd and Shriram Group have decided to call off their present merger talks and look for a fresh proposal as the two have failed to find common grounds during their current talks.

At a meeting of the IDFC board on Monday called to discuss results of the merger talks, some IDFC shareholders are reported to have shown their unease with the valuation under the proposed merger plan.

The IDFC board which met today to discuss second-quarter results as well as the merger, decided to scrap the merger proposal and find an alternative to the previous proposal that faced resistance, mainly from IDFC shareholders.

The complex deal proposed by the managements involving at least four big entities involved in transport and consumer financing and infrastructure funding, failed to secure support from both stakeholders and regulators.

''The new plan, sources say, could be valuing IDFC higher than what was initially planned and a swap ratio now would be slightly beneficial to IDFC shareholders. Shriram shareholders may not lose out much as well.

IDFC, which has a market value of about Rs10,000 crore, was being valued at about Rs13,000 crore while the unlisted Shriram Capital, the holding company of Shriram Group, was being valued at around Rs25,000 crore for the proposed deal, according to sources close to the merger talks.

Billionaire Ajay Piramal's Piramal Enterprises Ltd holds a 20-per cent stake in Shriram Capital and in Shriram Transport Finance and Shriram City Union Finance, the publicly traded units of Shriram Capital.

IDFC won a preliminary permit for its banking unit in 2014, and the lender has been publicly traded since November 2015.

On 5 October, IDFC and Shriram extended an exclusivity pact for the proposed deal to 8 November, citing ''the extensive due diligence process involved in the ongoing discussions,'' according to stock exchange filings.

The original plan entailed merging the retail arm, Shriram City Union Finance, with IDFC Bank, unlisting Shriram Transport Finance and making it a fully-owned unit of IDFC and the holding company of the merged entity.

As per the merger proposal, the life and general insurance units of Shriram Group were to become units of IDFC, IDFC Bank.

Under the new plan, Shriram Group may delist its transport finance arm as it was this unit that caused a skewing of the swap ratio.

A merger of Shriram Capital and IDFC would have created a financial conglomerate with a universal bank and the ability to provide a range of financial products from insurance to vehicle finance.

Under the plans laid out earlier, Shriram City Union Finance Ltd was to merge into IDFC Bank Ltd, with Shriram Transport Finance Co remaining as a standalone unit of IDFC.

The Indian government is IDFC Ltd's biggest shareholder with a 16.4 per cent stake after IDC Bank, which owns majority 52.8 per cent in IDFC. A unit of Malaysia's sovereign wealth fund Khazanah Nasional Bhd holds 9.5 per cent in IDFC Ltd.

Other foreign shareholders own little more than 20 per cent in IDFC. Akash Bhanshali of Enam Securities, and Ashish Dhawan, co-founder of Chrysalis Capital, are prominent individual shareholders of IDFC.

On Friday, IDFC Bank shares closed 0.44 per cent down at Rs56.95 a share on the BSE, IDFC Ltd closed 4.15 per cent down at Rs63.55 a share while Shriram Transport Finance shares were up 3.62 per cent at Rs1,159.75 a share.