HDFC and Max Life- A Symbiotic Collaboration

Joining hands to turn into the largest listed life Insurance Company in the private sector in India with the market cap touching 65000 crores. It’s the two giants Max life and HDFC Life. On Monday the board of HDFC nodded head for the merger with Max Life and Max Financial Services.

The total Premium of the merged entity is around 26000 crores with Asset under management to top at 1 lakh crores beating ICICI prudential in terms of AUM.

As a part of the proposed transaction, Max Life will merge into Max Financial Services which the listed entity is getting 1 share of Max Financial Services for 4.98 shares. Then Max Financial will demerge the life insurance business into HDFC Life. In the third step, Max Financial will merge with Max India (listed entity) business of Max Financial would be finally amalgamated into Max India Limited.

Shareholders of Max Life are to get 2.33 shares of HDFC for each of theirs share. It will create value to the Hdfc Shareholders in the long run.

Post merger Hdfc will have a shareholding of 42.5 % and cease to be a subsidiary the shareholding structure is as follows:24.1% for Standard Life,7.8% for Mitsui Sumitomo, 6.5 % Max Financial Promoters and 19.1%others.

Owing to Max deal which will involve exchange of Shares instead of cash, HDFC Life has put hold to proposal of its IPO and to get listed under both Bse and Nse.

Housing Development Finance Corp. Ltd (HDFC) and Standard Life (Mauritius Holdings) 2006 Ltd will be the promoters of the merged entity, which will be named HDFC Life and also be a listed company. It will also license the Max brand for seven years after the completion of the transaction.

Chairman of Max Life Analjit Singh said that they are seeing structural changes in the industry, distribuition, bancassurance.(selling insurance products through banks)

They will keep the jobs intact though there might be overlapping.

The merger will require approval from IRDA, high court and SEBI with entire process taking round about 12-15 months.

As part of this deal, Singh(Chairman of Max Life) 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 totaling Rs 349 crore.

Max Financial Services will need the approval of its public shareholders (who hold 69.5%) for the payment of the Rs.850-crore non-compete fee to its promoters.

Current Status: HDFC Life, the third largest private life insurance company in terms of first-year premiums, collected a total first-year premium of Rs.6,488 crores in the year ended 31 March.

In the same fiscal, Max Life collected a total first-year premium of Rs.2,882 crores. HDFC Life posted a net profit of Rs.818 crores and Max Life Rs.439.1 crores in the year ended 31 March.

Benefits from the Merger

• It will be able to save costs as the expense ratio improves significantly.
• Expanded distribution network will allow them to grow faster.
• Expectations of High Bancassurance partnership for HDFC.
• The combined entity will be able to achieve double digit annual growth.
• Company believes that, The growth rate of the company will have an upside Delta of about 2-3 percentage points, which means if the two companies are growing at around 10% annually right now, the merged entity can grow at 12-13% every year.

Implication

The valuation of the merged entity (HDFC Life + Max Life) comes toRs.66,508 crores, matching the 69:31 relative valuation disclosed. HDFC Life uses the market consistent embedded value measure(metric to value insurance companies), which is defined as the present value of shareholders’ interests in the business.

The impact in the Nifty is shown in both Max Finance and HDFC Life. The pre meger low for Max Finance was at 476.7 on 5th August which made a high of 568 on 8th after the deal was announced.

In case of HDFC it made a low of 1323 on 5th August and touched the high of 1376 on 8th closing at 1343.

A writer by day and a passionate reader by night. Writing just doesn't fill my pocket but it also fills my heart. Passion for writing about new events & happenings is what soothes my mind & soul.