Mumbai: India’s second largest life insurance company HDFC Life with an estimated market value of Rs.67,000 crore is about to get off the ground. This will happen once the all share transaction between HDFC Life, Max Life and Max Financial Services is completed in an year and a half from now.
The merger deal has been announced by HDFC Chairman Deepak Parekh and Max Group Chairman Analjit Singh this Monday.
The merged identity would retain HDFC Life as its name. HDFC Life EO Amitabh Chaudhry will head the merged entity
According to an HDFC release, the boards of HDFC Life, Max Life and Max Financial Services have approved the scheme of arrangement of paying the Max Promoter group a non-compete fee of Rs 850 crore over a four year period. Arpwood Capital is the lead financial adviser to the deal.
“As per the agreed valuation and exchange ratio, the relative valuation of HDFC Life and Max Life would be 69 per cent and 31 per cent, respectively,” stated the HDFC Life release.With the regulatory and other approvals through, the companies will engage in a series of transactions and the deal come a full circle with Max life being absorbed by its parent company Max financial Services.
-Five shares of Max Life will fetch its shareholders one of Max Financial.Share holders of Max financial will receive 2.33 shares of HDFC Life for every one share of theirs.
-Max Financial holder of the remaining business will merge into Max India
– HDFC Life- the new entity- will become a listed company with HDFC Ltd and Standard Life (Mauritius Holdings) 2006 Ltd as its promoters.
-In the merged entity, HDFC will own a 42.5 per cent stake, Standard Life 24 per cent, the Max Group 6.6 per cent, Mitsui Sumitomo 7.8 per cent and Axis Bank 1.2 per cent.
-Mortgage company HDFC and Standard Life currently own 62 per cent and 35 per cent, respectively, of HDFC Life. Max Financial and Mitsui Sumitomo currently hold 68 per cent and 26 per cent, respectively, of Max Life.
Mr. Parekh described the merger as long term value creation for shareholders of HDFC life.Mr. Analjit Singh said Max Life and HDFC Life complemented each others strengths. “We are a bride in this marriage,” he added.
“We see structural changes in the industry, distribution and bancassurance. We see shorter-horizon products being more palatable. We see margins will come under pressure… The future of the merged entity will bring much more value through HDFC,” said Mr Singh in justification of the merger decision.
A non-compete fee of Rs 501 crore of this upfront would be given to promoters of Max Financial over a period of four years after the completion of the transaction. This payment would be followed by three equal annual instalments totalling Rs. 349 crores the HDFC release stated.
HDFC life has also entered into a trademark license agreement for seven years after completion of the transaction. According to this agreement, HDFC Life will be able to use the Max brand as part of its life products . This is being done to further consolidate the business.
A second takeover for the mortgage company this year, after HDFC Ergo, its general insurance arm, bought L&T General Insurance for Rs 551 crore, making it the third-largest private sector insurer in the space.
The merger makes HDFC Life the second-biggest insurer in the country with a 10.8 per cent market share, behind state-owned Life Insurance Corp of India (LIC), which commands a 70 per cent share.
The merged entity will have an embedded value of over Rs 15,000 crore. The combined entity will have assets under management of Rs 1.10 lakh crore. HDFC Life has 15,108 employees while Max Life has a workforce of 9,000. HDFC Life operates through 398 branches and Max Life through 210.
HDFC Life generates 76 per cent of its premium income through HDFC Bank branches. Max Life has a corporate agency tie-up with Axis Bank, which generates 67 per cent of its policy premium income.
HDFC Life seeks to keep all staff. “We are trying to create a growth franchise and retain every employee and give them scope to grow,” said Amitabh Chaudhary EO HDFC Life.
“There will be overlapping but we want to retain as many as possible. There is an integration committee to look at which people will do what job.”
Besides shareholder approval, the merger will need the consent of the Insurance Regulatory and Development Authority of India, the Securities and Exchange Board of India, the Competition Commission of India and courts.
The Indian insurance market has witness several ups and downs affecting rate of growth. Having seen a compounded growth of 35 % between 2000-2008 the industry grew at a slowed by 6-8 per cent in the years to come.
Presently there are 24 life insurance companies in India, most of them in foreign partnerships. After foreign direct investment limit was hiked from 26 per cent, many overseas investor have raised their equity to 49 %.