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Journalism of Courage
IDFC Ltd and Shriram Group on Monday called off their planned merger following difference of opinion over “relative valuation” said Rajiv Lall, managing director and CEO of IDFC Bank.
“It has come apart on difference of opinion over relative valuation. Strategic value, long term value creation, regulatory issues were all sorted out … There was no consensus among the four shareholders there (Shriram Group) about the fairness of our offer. Therefore, they didn’t come back with a counter offer,” Lall told The Indian Express.
In a filing to stock exchanges, IDFC said that despite best efforts, IDFC Group and Shriram Group have not been able to reach common ground on a mutually acceptable swap ratio for the merger.
“Accordingly, both parties have agreed to call off discussions on a potential merger and the exclusivity period pursuant to the CES Agreement entered into between the concerned parties stands terminated with immediate effect,” the filing said.
Lall said while there was a lot of scepticism among the shareholders of IDFC when the deal was announced, however, the company was able to explain and persuade its limited shareholders of IDFC after doing a comprehensive due diligence of Shriram Group.
In June, IDFC Bank and Shriram Capital had agreed to explore the merger aimed to create one of the country’s largest retail banks, which could be valued at over Rs 65,000 crore. According to the initial plan, Shriram Transport Capital was to remain a separate entity post-merger and all the other operating companies of Shriram Group was to merge into the bank and create a Rs 20,000-crore retail bank. Now with the merger no longer an option, Lall said that IDFC is not desperate for the deal and will continue to look at others without “compromising the organic growth plan” of IDFC Bank.
“It will take us 3.5 years to get out of legacy issues like Rs 3,700 crore of net underperforming assets that are earning a return that is lower than the cost of funding and Rs 36,000 crore of fixed rate bonds at an average cost to me at 8.9 per cent which will start falling off in 2021. Because of these there is a Rs 600 crore net interest income drag every year. If we were to bring down that 3.5 years time frame to a year–year-and-a-half, that is the perspective from which we are looking at a potential inorganic growth. It is only to accelerate the pace and propel ourselves, not because we have to do it,” said Lall.
Lall said acquiring state-run banks that may be up for grabs after a few years “does not look promising” for IDFC Bank due to weak disclosures of such banks.
“The public sector banks may be good for liabilities franchise but the problem is … if we are trying to merge with a listed bank, for us to be able to get the right amount of information to find out how bad their book is, will be very tough. That would make our board and me very uncomfortable,” said Lall.
The government is the biggest shareholder of IDFC with 16.4 per cent stake while a unit of Malaysia’s sovereign wealth fund Khazanah Nasional Berhad holds 9.5 per cent, according to exchange filings.
IDFC holds 52.8 per cent stake in IDFC Bank, which started operations in October 2015. The government holds a 7.7 per cent stake in the bank.
