M&A Critique

Max gives its ‘Life’ to HDFC

Earlier last year, Max Group had decided to vertically split Max India Ltd. into 3 separate listed companies-

  1. Max India Ltd (Health and Allied Businesses)
  2. Max Financial Services Ltd (Life Insurance)
  3. Max-Ventures and Industries Limited (Manufacturing).

This was done for focused management and operations, giving shareholders options based on risk and to explore the opportunities to introduce a strategic partner in each of these verticals.

In August 2016, Max and HDFC group decided to combine their life insurance businesses.

Max Financial Services Ltd. (MFSL)

MFSL is mainly engaged in growing its business investments and providing management advisory services to the group. Its main investment is the 69.01% stake in its subsidiary Max Life Insurance company Ltd.

Max Life Insurance Company Ltd. (Max Life)

Max Life Insurance, the leading non-bank promoted private life insurer, is a joint venture between MFSL and Mitsui Sumitomo Insurance Co. Ltd (MSI). It is among the top private life insurers with a market share of 9.7% at the end of FY 2015.

HDFC Standard Life Insurance Company Ltd. (HDFC Life)

Established in 2000, HDFC Life is one of India’s leading life insurers. It is a partnership between HDFC Ltd., India’s leading housing finance institution and Standard Life, a global long-term investment savings player. Currently, HDFC Ltd. holds 61.6% and Standard Life (Mauritius Holdings) 2006 Limited (Standard Life) holds 35% of the equity in HDFC Life, while the rest is held by others.

Structure *

The Board of Directors of MFSL has approved a composite scheme of arrangement and execution of related definitive agreements at its meeting on 8th August 2016. The structure is as follows (refer Fig. 1) –

  1. Max Life will first merge with its parent Max Financial Services Ltd.
  2. In the next stage, the insurance unit will be demerged from this entity into HDFC Life which will be listed automatically.
  3. Finally, the non-insurance businesses of Max Financial will merge into group company Max India Ltd.

Figure 1: Transaction Structure of Merger and Demerger between Max and HDFC.

*Update on the structuring as on 19.12.2016


  1. Business synergies and operating leverage
  2. Increasing shareholder value
  3. Creating benefit to policyholders with larger net worth
  4. Providing shares of listed company
  5. Increase in financial strength to create the largest private life insurance company


  1. Merger of Max Life into MFSL: 1 Equity share of MFSL for every 5 shares held in Max Life
  2. Demerger of Insurance undertaking into HDFC Life:
  3. Shareholders: 7 Equity shares of HDFC Life for every 3 shares held in MFSL.
  4. Promoters (Analjit Singh and kin): Non-compete fee of Rs.850 crore (in installments over 4 years)
  5. Merger of remaining MFSL into Max India Ltd: 1 Equity share of Max India for every 500 shares held in MFSL


Table 1: Swap Ratio Report of Max Life and HDFC Life.

SN Particulars In crores
1 Market cap of MFSL (Average) 14,000
2 Stake in Max Life 69.01%
3 Value of Max Life* 20,287
4 Max’s proportion in merged entity # 31%
5 Value of merged entity 65,442
6 Average price/share of MFSL (Average) 525
7 Swap ratio for HDFC Life and Merged MFSL 2.33
8 Implied per share value of HDFC Life 225

*The non-life insurance business has been ignored as it is immaterial
#According to press presentation and exchange ratio, the relative valuation of HDFC Life and Max Life would be 69% and 31% respectively

The transaction values HDFC Life at 4.5 times its FY16 embedded value and Max Life is valued at 3.7 times.

Shareholding Pattern

Figure 2: Pre-Deal Shareholding Pattern (Source: Press Presentation dated 8.8.2016, verified by HU Consultancy)

HDFC Ltd and Standard Life Ltd will be the promoters of the merged entity, which will be named HDFC Life and also be a listed company.

HDFC currently holds 61.6% of HDFC Life. HDFC will cease to be the holding company of HDFC Life post the merger and will hold around 42.5% of the merged entity. Standard Life will own 24.1% in the merged entity (Ref Fig. 3).

Figure 3: Post Deal HDFC Life Shareholding Pattern. Dotted Lines represent promoters’ stake. (Source: Press Presentation, 8.8.2016 verified by HU Consultancy)

The promoters of Max Financial, essentially Analjit Singh, his family and related family firms, will hold 6.5% in the merged company and also get a non-compete fee of Rs.850 crores.

Non-compete fees

Non-Compete of Rs.850 crore will be paid by the merged entity instead of HDFC, the acquirer. Hence, minority shareholders of Max Financial will be indirectly paying part of the fee. This comes to 6% of the average market cap of MFSL.

In a market dominated by state-run Life Insurance Corp, the top 4 of the 23 private sector insurers account for 65 percent of the private sector insurance market, according to HDFC.

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. This could be subject to scrutiny by SEBI and a sticking point in the transaction.

Combined Entity in comparison to ICICI Prudential?

Table 2: Market Outlook Comparison for Combined Entity and ICICI Prudential as on 31.03.2016 (Source – Company’s website, annual reports and presentations)

SN Particulars Max Life HDFC Life Merged entity ICICI Prudential
1 Market share (among Private players) 9.7% (FY16 Q3) 14.7% 24.4% 21.9%
2 Market share (all players) 4.3% 6.5% 10.8% 12.4% (1H FY16)
3 Total Gross Premium collected (INR Crores) 9216 16,313 25,529 19,164
4 PAT (INR Crores) 439 818 1257 1650
5 EPS 2.29 4.1 5.7* 11.53
6 Solvency 343% 198% 252% 320%
7 Assets under Management (INR Crores) 35,824 74,230 1,10,054 1,03,939
8 Customers (in million) 2.9 4.1 7.0
Average premium per customer (actuals) 31,800 39,800 36,500
9 Net profit per customer (INR) 151 200 180
10 Key Bancassurance partners 3 5 8

*Based on combined profits of Max Life and HDFC Life and post issue number of shares of HDFC Life (Merged entity)

Max Life

  1. Operational synergies
  2. Rise from 4th to 1st position in private sector
  3. Diversification of product portfolio and increasing reach through distribution
  4. Post deal, it will act as a financial investor and has an option to take an exit easily.


  1. Indirect listing and opportunity to go for fundraising via public offer
  2. Diversification of product portfolio and increasing reach through distribution
  3. Control and management of merged entity in HDFC’s hands

Operational benefits

  • Distribution will be more efficient with Max Life’s agency channel and HDFC Life’s bancassurance channel. Distribution strength of 2 of India’s largest banks, HDFC Bank & Axis Bank will allow them to grow faster.
  • Complementing product mix – HDFC Life has a higher proportion of ULIPs (56% in FY16), while Max Life has a traditional policy (Par + NonPar) heavy portfolio (72% in FY16).

Wider and balanced product mix – Par (41%), Non- Par (15%) and ULIP (45%).

  • 7 million customers
  • Cost synergies in terms of value engineering and expense ratio.
  • Combined strength of over 1.25 lakh agents
  • Solvency surplus of 2600 crore+
  • Higher cross-selling opportunities
  • Trademark license agreement to use ‘Max’ brand as part of life insurance products transitioning from Max Life for 7 years post-merger completion


Drivers for the deal could be the inorganic growth opportunities due to increasing the FDI limit of foreign holding to 49% and IRDAI’s intention of mandatory listing for all insurers in the future. Max Life had the option to merge with a small insurance company which would increase their capabilities and reach or go for a large player for high growth and synergy benefits. HDFC Life, on the other hand, was planning to raise capital through an IPO.

The deal enables Max promoters to exit and HDFC to list its insurance business without dilution through IPO and better prospects for public shareholders with strong growth. Moreover, the foreign holding post deal goes to about 42% which is now within the capping of IRDA.

With Rs.1.1 trillion of assets, the merged entity will overtake ICICI Prudential Life Insurance Co. Ltd as India’s No. 1 private insurer, although state-owned Life Insurance Corporation of India (LIC), which had Rs.21.70 trillion of assets at the end of March 2016 will still dominate the insurance scene in India.

Valuation may have placed HDFC Life at a premium given its balanced product portfolio, distribution channels or its high market share. But Max Life shareholders should be more than happy as the deal will give a substantial push to the company’s size and valuation.

HDFC Life Executive Officer Amitabh Chaudhry will head the merged entity and it will be controlled by its new promoters, HDFC and Standard Life which together own 67% stake post deal.

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Sahil Jain