Exclusivity period for IDFC-Shriram merger talks unlikely to be extended

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Mumbai: IDFC Ltd and the Shriram Group are unlikely to extend the exclusive negotiation period for their proposed merger which is ending on 8 November, said two people aware of the development.

Executives of IDFC and Shriram decided this on Friday, said one of the two people cited above, who attended the meeting between the two groups. The proposed merger of the two financial groups is stuck because of differencesover the valuation of IDFC.

“There is resistance from the shareholders of IDFC and Shriram over the proposed valuation and shareholding structure after the merger,” said this person. Terminating the exclusivity period means that the firms are free to talk to other prospective suitors and increases the likelihood that merger may not go through.

IDFC’s board is set to meet Monday to discuss its September quarter earnings. The board may announce the termination of the exclusivity period too, said the person.

“Exclusivity talks are like rituals. If you don’t look at the final outcome, what good are they?” said the second of the two people cited earlier, both of whom spoke on condition of anonymity. “We believe in the synergies this deal offers, hence will continue talking. But the share swap is only one issue. There are many others, but if the shareholders can’t agree on the share swap, we can’t move forward.”

Rajiv Lall, managing director and chief executive of IDFC Bank, declined to comment. A spokesperson for Ajay Piramal said the chairman of the Shriram Group would not be able to comment by Sunday evening.

On Friday, Mint reported that the merger is in trouble due to valuation concerns raised by some IDFC shareholders, including Enam Holdings Pvt. Ltd and Sipadan Investments (Mauritius) Ltd, a unit of Malaysian sovereign wealth fund Khazanah Nasional Bhd.

Some IDFC shareholders are demanding a valuation that is about a 60% premium to the current market value of the company, fearing a dimunition in their holdings in the merged entity. Khazana and Enam hold around 15% in IDFC while the government holds another 16.4%.

“Even though the IDFC board can legally go ahead with the merger since it has over 75% of board members approving the merger, the board is unwilling to act against the (wishes of) dissenting shareholders,” said the first person cited earlier.

“IDFC Bank has been unable to grow its business meaningfully in the retail side and if the proposed merger goes ahead then, they could gain out of the strong network that Shriram Group has established over the years. As far as the valuation is concerned, market is already giving a fair value to both IDFC group of companies and Shriram group of companies, so any sort of high expectations towards valuations by either of the group for them would be unfair,” said Siddharth Purohit, an analyst with the institutional equities team at SMC Global Securities Ltd.

IDFC and Shriram announced their merger plan on 8 July, agreeing on a 90-day exclusivity period to complete the due diligence process. The exclusivity period was later extended until 8 November.

Under a three-tiered structure, the retail arm of Shriram Capital, Shriram City Union Finance Ltd, was to be merged with IDFC Bank Ltd; Shriram Transport Finance would become a fully owned unit of IDFC and be delisted; and IDFC would also become the holding company for the Shriram Group’s insurance businesses.