Shares of companies of the Shriram Group and IDFC fell on Monday, amidst concerns on the complexities and regulatory hurdles of their proposed merger. The proposed merger was announced on Saturday by representatives of the two groups. Jefferies observed that the final deal could potentially be complex given the involvement of three large listed entities. It noted that there could be issues in “having an NBFC and a bank under the same Non Operative Financial Holding Company (NOHFC)”.
Shriram City Union Finance (SCUF) lost 5.56%, the biggest fall since January 31, and ended the session at Rs 2,328.10. Shriram Transport (SHTF), on the other hand, fell by 3.33% and ended Monday’s session at Rs 1,054.35. The share price of IDFC also fell 5.68% and ended the session at Rs 56.50. However, the share price of IDBI Bank rose marginally by 0.69%.
According to the proposal, Shriram City Union Finance will be merged into IDFC Bank and Shriram Transport will remain as a standalone unit of IDFC. The life and general insurance units of Shriram Group will also become part of IDFC.
The details of the deal will be worked out over the next three months and the merger would be subject to a host of approvals from regulators including Reserve Bank of India (RBI), Securities &Exchange Board of India (Sebi), and Insurance Regulatory and Development Authority of India (Irda).
Analysts say integration could also be a key challenge as the three main entities are largely diverse businesses with different operating models. SHTF targets the under banked small truck owner-operator segment. “SHTF’s competency lies in its ability to assess cash flows and credit quality of customers in this segment. This is in contrast to the business model of a bank,” they point out. The scope for SHTF leveraging IDFC’s customer base is limited, analysts say. Thus, while the deal may potentially offer IDFC access to a customer base of SHTF and SCUF, there is limited synergy potential or cross sell gains from SHTF’s standpoint.
“SHTF’s shareholders may get IDFC shares and thus would likely get exposure to disparate businesses (including a bank) instead of niche pre owned CV financing business,” an analyst said.
Analysts also expect a reduction in the book value of IDFC Bank. “If merger swap is based on current prices and assuming that IDFC Bank will be the combined company, it will lead to 22% dilution in IDFC Bank’s book value and be neutral to earnings,” said Nomura in a note to investors.