In a crucial transaction, HDFC Life has announced the acquisition of a 100 percent stake in Exide Life for a price of about Rs 6,700 crore. This values Exide Life Insurance at about 2.50 times the price to embedded value.
CNBC-TV18’s Yash Jain explains what this transaction brings to the table for both entities, that is Exide Industries, the holding company, as well as HDFC Life Insurance.
There is an inherent deal structure benefit that Exide Industries derives from the transaction. It’s because the company gets about Rs 726 crore in cash from the transaction upfront. Also, it gets HDFC Life shares worth Rs 5,960 crore at a price of about Rs 685 crore. When this price is compared with the current CMP of HDFC Life, Exide Industries is making a notional gain of about Rs 400 crore on the day of the transaction announcement itself.
Post the transaction, Exide Industries would be holding about a 4 percent stake in HDFC Life, which gives it further headroom as far as value unlocking out of this particular stake is concerned.
The next is the valuation benefit. The deal values Exide Life Insurance at about 2.50 times the price to embedded value, which according to most analysts on the street is much better than what it was expecting. The company was expecting, what analysts say, a discount to embedded value but this is about 2.50 times the price to embedded value so that is a benefit.
Finally, crucial fundraising is what the deal facilitates for Exide Industries. This comes at a time when Exide Industries is planning to invest in lithium ion batteries and also the ACC battery and it would receive funds at the right time for the investment.
Now a look at the addition the deal makes to HDFC Life’s financials-- 8.50 percent to total premium, 14 percent to renewal premium, 10 percent to embedded value, and asset under management.
Secondly, the transaction will give a strong fillip as far as the agency distribution is concerned. Forty percent of the premium will get added to the agency premium that the company collects with an addition of about 36,000 agents.
Bancassurance has been going strong for HDFC Life. It has, several times, spoken about growing its agency channel and now with this transaction, the agency channel will also fire up giving it two strong modes of distribution as far as products are concerned.
Finally, HDFC Life through this transaction will be able to expand its footprint in south India. Ironically, HDFC Life just gets about over 70 percent of its business from regions ex- South India and what fits this synergy exactly well, is that Exide Life gets more than 70 percent of its business from south India.