Analjit Singh led Max Financial Services is in talks with Aditya Birla Group to explore a merger of their life insurance businesses, Birla Sun Life and Max Life Insurance with the aim to create one of the top 3 private life insurers in the country, said multiple sources aware of the discussions.
Parallely, the Delhi based serial entrepreneur is also believed to be negotiating with UK-based Northern Trust which manages a trillion dollar of assets and PE firm Apax Partners to sell his promoter stake of 30 percent in Max Financial Services.
These negotiations are at an early stage and the various groups are examining the regulatory contours but gathered momentum after HDFC Standard Life Insurance Co. Ltd and Max Life Insurance Co. Ltd called off their proposed merger end July, failing to win regulatory approval for a union that would have created an insurance giant with Rs1.1 trillion in assets.
However, the sources mentioned above warned that these discussions may not gaurantee a transaction.
Birlas have been on the lookout for scaled franchise for long while Singh has been open to monetising his investments. The key rationale for exploring a merger is the fact that Birla Sun Life does not have large bank partners which Max has in the form of Axis and Yes — the third and fourth largest private bank in the country. Even though in the last one year, Birla Sun Life have managed to tie up with six banks, they are all much smaller.
“We expect more bank-insurance tie-ups, beyond the top four banks. .. Max has option to either partner with these (beyond top four) banks or explore an M&A option,” wrote analysts with Kotak Institutional Equities last month.
Cyril Amarchand Mangaldas is believed to be involved as a legal advisor in the ongoing Birla-Max negotiations.
PE players like Apax – having invested $1.5 billion since opening India office in 2007 with plans to deploy another billion in the next 4 years — has historically been strong backer of financial services firm having backed Shriram City Union Finance, CholamandalamBSE -1.02 % Finance as well as insurance brokerages Assured Partners, Hub International worldwide.
Northern Trust too has been looking to invest in financial services in India. They had in the past explored opportunities in asset management business but did not invest.
Spokespersons of Max Financial, Aditya Birla Group declined to comment on speculation. Mails sent to Apax Partners and Northern Trust did not get a response till press time.
The MFS stock has appreciated a little over 8% in the last 1 month.
Birla Sun Life is a 51:49 JV between Aditya Birla Capital Limited (ABCL) and Canada’s Sun Life. Max Financial Services was formed in January 2016, as the result of a three-way demerger of Max IndiaBSE 0.02 %. MFS is the holding company for Max Life, India’s largest non-bank promoted private life insurance company. MFS currently holds 69% stake in Max Life, its Japanese partner Mitsui Sumitomo owns 25% with Axis BankBSE -1.38 % owning 4.9% of the venture. The remaining 1% is held through management ESOPs.
According to sources, one of the structures being explored is a plain merger of the two operating life insurance businesses and a subsequent change in the shareholding with Aditya Birla Capital buying out Singh and his partners either partially or entirely.
Alternatively, ABCL or any of the other suitors can buy into MFS and trigger an open offer, following which the operating companies and their listed holdcos can merge. The promoters Analjit Singh and family control 30.42 percent of MFS.
“Typically the regulator prefers mergers. So IRDA is unlikely to allow 2 entities with 2 licences with the same set of shareholders. It would be far easier to merge the businesses and then realign shareholding,” said a Mumbai based senior legal source specialising in insurance mergers.
The challenges, feel analysts, will be agreeing on any non-compete fee and locking in Axis — the key value creator — in the merged entity.
During the three-way merger discussions the promoters of MFS had negotiated an Rs 850 crore non-compete fee from HDFC Life as a condition for the deal. This was reminiscent of a similar transaction of 2012 when Mitsui Sumitomo Insurance (MSI) bought 26 percent stake in Max New York Life Insurance Company Ltd for around Rs 2,731 crore, marking the exit of New York Life Insurance, the original foreign shareholder in the JV. The issue of a non-compete fee caught in regulatory and minority shareholder crosshairs. This fee or control premium could again turn out to be deal spoiler.
Max Life, India’s fourth largest private life insurer has a 7.9 percent market share with assets under management (AUM) of Rs. 44,370 crore as at 31st March 2017, growing 24% over last year. In FY2017, the company reported individual adjusted sales of Rs 2,639 crore, growing 25% and revenues of Rs. 12,937 crore growing 19%. Its embedded value stood at Rs. 6,590 crore. as at 31st March 2017 with an operating return on EV (RoEV) of 20%. The Value of New Business (VNB) written during FY2017 was Rs 499 crore, growing 29% over the previous year, and the new business margin stood at 18.8%.
Compared to its peers, Birla Sun Life Insurance has been an under-performer in the insurance space. With a 7.1% market share, the total premium it collected stood at Rs 5700 crores in 2017 versus Rs 5200 crores in FY2013, whereas profit before tax has fallen from 540 crores in 2013 to just 120 crores in FY2017. Birla Sun Life has embedded value of 3400 Crores in FY2017.
“Max is a little less than two times embedded value than Birla while its equity value will be more than double. Back of the envelope calculation should give Max an equity valuation of Rs 23,000 crore while that for Birla should be Rs 10,500 crore,” said an investment banking official.
The proposed Max Life Insurance acquisition deal with HDFC Life was to happen at 4.3x embedded value whereas ICICI Prudential trades at 4.10x FY2017 embedded value. Typically these businesses get valued at 3-4X EV.
CRISILBSE -0.48 % Research forecasts new business premium for life insurers to grow at 11-13% CAGR from fiscals 2017 to 2022, compared with 9% CAGR between fiscals 2012 and 2017. They estimate total premium to grow at 13-15% CAGR over the next five years, from Rs 4,181 billion in fiscal 2017 to Rs 7,900 – Rs 8,100 billion by fiscal 2022. Improving economic growth, low inflation, and increase in financial savings, along with rising awareness of insurance, would be the key catalysts.
