Mumbai: Bajaj Finserv Ltd is likely to buy out its German partner Allianz SE’s stakes in two insurance units—Bajaj Allianz Life Insurance Co. Ltd and Bajaj Allianz General Insurance —in a deal estimated at as much as Rs.10,000 crore, three people familiar with the development said.
Bajaj Finserv Ltd, the financial services arm of Bajaj Holdings and Investments Ltd, owns 74% and Allianz SE holds 26% in both the ventures.
Allianz has been in discussions with Bajaj to increase its stake in the two insurance firms to 49% after the government raised the foreign investment limit in Indian insurers to 49% from 26% in March 2015. The discussions failed to yield any result since the two parties could not agree on the price.
“To increase the stake by 23% in the two firms, Allianz will be required to spend a much larger amount as per the fair-valuation method as compared to the pre-determined rate according to the call-option clause in the agreement between Bajaj and Allianz. Hence, the deal is not being preferred by Allianz at all. Bajaj is willing to buy Allianz’s 26% stake each in the two firms. As per the fair-valuation method, Bajaj will have to invest around Rs.10,000 crore to buy Allianz’s stakes in the two insurance companies,” said the first person who is directly familiar with the talks between Bajaj and Allianz, and their deal plans.
If the deal goes through, it will be one of the biggest buyouts ever in India’s insurance sector.
When contacted, Sanjiv Bajaj, managing director at Bajaj Finserv, said: “Theoretically, there are many options that can be thought upon. The discussions between Bajaj and Allianz are on. No final decision has been taken yet on whether Bajaj will buy Allianz’s stake or a third party will come and acquire Allianz’s holding in the two insurance JVs. If the final decision at all happens to be Bajaj buying any stake in the insurance JVs, we will have to go to the next stage and appoint a fair valuer for the stake as per RBI guidelines. Within the next few months, we will be able to take the final decision,” Bajaj said.
“The pricing of the issue was subject to RBI regulations from day one. The decision whether to be in India or not is still to be thought through by Allianz and the discussions are on. There are several rumours going on in the market and we cannot comment on those rumours. I cannot give you the details about pricing issues until a decision is taken. It may be a complete speculation at this stage to say that Bajaj will be buying out Allianz’s stake in the two insurance JVs because a final decision has not been taken yet and no one can say in what direction things will go. There are multiple discussions but both the parties are keen to continue together so far. And, whatever is the final decision agreed between Bajaj and Allianz, it will not affect the business of the two companies in any manner,” Bajaj added.
“India is a vibrant market where Allianz holds a keen interest and remains committed,” said an Allianz spokesperson in response to an email query seeking comments sent on Sunday.
Differences between Bajaj and Allianz cropped up because of a significant difference in the estimated value of the stake in the two insurance ventures, according to an agreement that was entered upon by the two groups 15 years back and as per the fair valuation formula, said one of the three people cited earlier.
The shareholder agreement, which was entered upon in 2001, had a call option clause that allowed Allianz to increase stake in Bajaj Allianz Life Insurance and Bajaj Allianz General Insurance at a pre-determined price within 15 years of agreement.
However, a later ruling by the RBI in 2010, and a subsequent directive by the insurance regulator for stake transactions in the Indian insurance industry, mandated all stake transactions to be carried out at a fair value or the prevailing market value.
This ruling superseded all agreements entered into by JV partners in the insurance business, and complicated the pricing of the deal.
Besides, Allianz has been exiting JVs globally. Recently, Allianz sold its 50% stake in a life insurance JV with Hana Financial Group Inc. in South Korea.
“Bajaj and Allianz are currently in dialogues. Allianz prefers to increase its stake by executing the call option mentioned in the shareholder agreement between the two groups in 2001. Bajaj wants the transaction to be done following the fair valuation method. If the deal is done with the fair-valuation method, the value of the deal becomes significantly larger than what it could be if the call option was executed by Allianz,” said the second person.
The second person said as per the fair valuation method, Bajaj Allianz Life Insurance is valued at Rs.20,000-25,000 crore. And the fair value of Bajaj Allianz General Insurance could be at about Rs.20,000 crore, he said.
“This makes the combined fair value of the two insurance JVs to be around Rs.40,000-45,000 crore. This means at the fair value if Allianz wants to increase its stake from 26% to 49% each in the two JVs, it will have to invest Rs.9,200-10,350 crore in total, which is much larger than the value as per the call-option mentioned in the 2001 agreement,” the first person said.
Under the shareholder agreement, Allianz could increase its stake in both the insurance ventures at much lower prices.
At present, Bajaj Allianz Life has a total of 150.71 million paid-up equity shares. Of this, Allianz holds 26%. According to the agreement signed on 31 July 2001, Allianz SE could exercise a call option any time within 15 years to increase its holding up to 74% at a price of Rs.5.42 per share plus interest at 16% per annum compounded annually from 31 July 2001 to the date of payment.
The agreement mentioned that if Allianz increases its stake in the life insurer after 30 July 2016, it will have to pay either the market price if Bajaj Allianz Life gets listed on the exchange or the price as per the fair valuation method,whichever is higher.
This means if Allianz was allowed to raise its stake as per agreement, the value of 23% shares of Bajaj Allianz Life atRs.5.42 apiece could be Rs.18.78 crore plus an interest of 16% compounded annual interest, which works out to be a total amount of around Rs.174 crore.
Similarly, under the agreement, Allianz SE could exercise call options to increase its holding to 50% from the present 26% in Bajaj Allianz General Insurance Co. Ltd any time before 22 April 2016 at Rs.10 per share plus an interest of 16% per annum compounded annually from 23 April 2001 to the date of payment.
In the general insurance business, there are 110.23 million equity shares. According to the agreement signed in 2001, if 23% of the shares were to be bought by Allianz now to increase its stake to 49%, Allianz will need to pay around Rs 234.88 crore. But, after 22 April 2016, to increase any stake in the insurance company, it will be required to pay either the market price if the insurer were listed, or the price as per the fair valuation formula, whichever is higher.
A back-of-the-envelope calculation by Mint shows that at the pre-determined rate, Allianz could be required to pay only a total of Rs.408.88 crore if it were to increase its stake by 23% in the two insurance JVs. This is far lower than the prevailing fair value of Rs.9,200-10,350 crore as mentioned above.
“The difference is huge. So, Allianz SE is preferring to exit the two JVs and Bajaj is likely to buy Allianz SE’s 26% stakes in the two insurance JVs at a total combined fair value of aboutRs.10,000 crore,” added the first person.
According to the profit and loss statement of Bajaj Allianz Life Insurance, the company’s net profit rose to Rs.878.96 crore for the year ended 31 March from Rs.876.21 crore in the previous year. As on 31 March, the net total assets of the company or the combined value of shareholders and policyholders’ fund in Bajaj Allianz Life Insurance stood at Rs.44,359 crore.
During the first two months of the ongoing financial year, Bajaj Allianz Life Insurance collected a first year premium ofRs.395.19 crore.
In the general insurance business, Bajaj Allianz General Insurance collected a net premium of Rs.4,224 crore during the financial year 2016, which is 10.2% more than Rs.3,832 crore in the previous year. Net profit rose to Rs.564 crore from Rs.562 crore in the previous year.
Earlier in June, Max Life Insurance and Max Financial Services said they will merge into HDFC Standard Life Insurance, in the biggest consolidation in the country’s private insurance sector.