Shriram Group stocks could see a relief rally as IDFC calls off $12-bn merger plan

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The much talked about deal between the IDFC Bank and Shriram Capital was called off on Monday as both sides failed to arrive at an acceptable valuation after four months of negotiations. IDFC and Shriram Group had announced their merger plan on July 8.

The confidentiality, exclusivity, and standstill (CEST) agreement entered into to evaluate a strategic combination of relevant financial services of the Shriram Group with the IDFC Group stands terminated with immediate effect, according to a release by IDFC.

The market was sensing a fallout which was evident in the rally seen in the Shriram Group stocks. The relief rally could even stretch on Tuesday while shares of IDFC Group stocks could see a minor setback, suggest experts.

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“The shareholders of Shriram Group should take a huge sigh of relief. The merger would have resulted in a holding company discount for Shriram Transport and merger of Shriram City Union in an underperforming IDFC Bank,” Jimeet Modi, CEO, Samco Securities told Moneycontrol.

“We could see a minor correction in the IDFC Group stocks due to the merger being called off and see a relief rally in the Shriram Group stocks,” he said.

Modi further added that a one-time adjustment will happen in the prices due to the event being called off and thereafter the stock prices would reflect business fundamentals and earnings, going forward.

On Monday, IDFC shares closed 2.68 percent down at Rs 61.70 while Shriram City Union Finance gained 1.93 percent to close at Rs 2,186.25 on BSE. The benchmark Sensex ended the day 0.33 percent higher at 33,266.16.

The proposed USD 12-billion mega-merger between IDFC Group and Shriram Group has been called off by the former as the two were unable to reach a common ground on the swap ratio.

The Shriram group’s NBFC underperformed in the NBFC basket, being subdued due to merger discussions, could catch up on the underperformance, suggest experts.

The deal would have created a financial conglomerate with a universal bank and the ability to provide a range of financial products from insurance to vehicle finance.

“Despite best efforts, the two groups have not been able to reach an agreement on a mutually acceptable swap ratio,” said an IDFC spokesperson.

“IDFC Bank’s strategy to expand its retail business at an accelerated pace and diversify its corporate business outside of its traditional infrastructure focus remains on track. IDFC Bank, while focusing on enhancing its strategic momentum, will continue to explore opportunities for inorganic growth as well,” he said.

As per the proposed plans, Shriram City Union Finance was to be merged into IDFC Bank, while Shriram Transport Finance Co. was to remain a standalone unit of IDFC.

“With existing shareholders of both groups (IDFC and Shriram) having discomfort over valuations, the merger transaction was evidently a disaster in the making since the beginning,” Saurabh S Jain, MD, SSJ Finance & Securities told Moneycontrol.

“Now with the transaction having fallen through, IDFC is the apparent loser, having lost out on a strong growth engine which it has been aggressively searching for its archaic banking business,” he said.

He further added that STCI, on the other hand, can only gain despite this fallout as it remains a strong merger candidate for other suitors in the market.