3:7 swap ratio for Max, HDFC Life merger

Transaction to be completed in 12 months; combined entity to be worth around Rs 65,000 cr

Deal structuring eased, teething troubles remain

HDFC Life and Max Life Insurance announced a swap ratio of 3:7 for their merger, expected to take place in 12 months.

In a three-stage deal, Max Life, the life insurance subsidiary of Max Financial Services, will merge with the parent. Shareholders of Max Life will get one share of Max Financial for every 4.98 shares held in Max Life.

The life insurance business will then merge with HDFC Life. The shareholders of Max Financial Services (after amalgamation with Max Life) will get 2.33 shares of HDFC Life for each share held in Max Financial Services.

Simultaneously, the residual business of Max Financial Services will get merged with Max India, another listed company of the Max group, which has market capitalisation of about Rs 3,500 crore as on Monday.

The valuation of the merged life insurance entity will be around Rs 65,000 crore, and will be called HDFC Life.

According to the agreed valuation and exchange ratio, relative valuation of HDFC Life and Max Life would be 69 per cent and 31 per cent, respectively, in the merged entity.

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In June, Max Financial Services and Max Life, a joint venture between Max Financial Services and Japan-based Mitsui Sumitomo Insurance, had agreed to merge with HDFC Life. Under this arrangement, Max Life was to merge with Max Financial Services as a precursor to the merger with HDFC Life.

3:7 swap ratio for Max, HDFC Life merger
Since Max Financial Services is already listed, the combined entity would automatically be listed, without HDFC Life having to go to the market separately for an initial public offering (IPO).

Analjit Singh, founder and chairman emeritus, Max Group said the merger will create the largest private sector insurance company in the country with a combined market share of 10.8 per cent.

“The product mix of HDFC Life and Max Life complement each other. The merged entity will also have a diversified distribution mix with the contribution (excluding group segment) based on FY16 new business premium being: Agency 19 per cent, bancassurance 64 per cent, direct (sales) 11 per cent, and others 5 per cent. On completion, HDFC Life is expected to have bancassurance partnerships with leading banks including HDFC Bank and Axis Bank,” HDFC Life said.

As part of this deal, Singh and his family will receive a non-compete fee of Rs 501 crore, payable after the transaction is completed. Singh will not be able to start a life insurance business for four years. The promoters will also receive three equal installments totalling Rs 349 crore.

Deepak Parekh, chairman of Housing Development Finance Corporation, said he expected the deal to be completed in 12 months.

In a statement to the stock exchanges in June, Max Financial Services and HDFC said their respective boards had approved entering into a confidentiality, exclusivity and standstill agreement to evaluate a potential combination through a merger. Their joint venture partners, Mitsui Sumitomo Insurance of Japan and Standard Life of the UK, have also approved the proposal.

Singh added Max Life could have consolidated and acquired a smaller company with less operating experience, meagre performance or traded up and merged with an iconic brand that has a substantially larger operation.

“We always feel happy to be a smaller portion of a bigger play, because that is what is best for the stakeholders,” said Singh.

After the merger, HDFC will hold 42.5 per cent in HDFC Life, Max Group will hold 6.5 per cent, Standard Life 24.1 per cent, Mitsui Sumitomo 7.8 per cent, and others including Axis Bank will hold 19.1 per cent. Hence, foreign shareholding will be 41.5 per cent.

The assets under management of the merged entity will be around Rs 1.1 lakh crore.

HDFC Life collected premiums of Rs 6,488 crore for financial year 2015-16 (FY16). Max Life, on the other hand, collected premiums of Rs 2,882 crore for FY16, and is among the top five private life insurance players.

Started in 2001, HDFC Life was the first private life insurance company to be granted a licence to operate in India.

HDFC Life posted a net profit of Rs 818 crore in FY16, registering a growth of 4.2 per cent over FY15. Its new business premiums grew 18.1 per cent to Rs 6,487 crore in FY16 from Rs 5,492 crore in FY15. HDFC Life’s total premiums collected grew 10 per cent to Rs 16,313 crore in FY16 from Rs 14,830 crore in FY15.

Max Life’s profit stood at Rs 439.1 crore for FY16. It collected Rs 2,881.93 crore of new premiums in FY16.