All you need to know about HDFC Life, Max Life merger

The boards of HDFC and Max Financial's groups have given their nod on Tuesday, to merge their respective life insurance entities. This will pave the way for more consolidation in the life insurance space. 

The deal is gargantuan in every sense of the word -- it will create a Rs 25,000 crore entity, with an asset base of over Rs 1 lakh crore, and valued at Rs 67,000 crore. 

The Rs 25-trillion domestic life insurance space is cluttered with 23 players, but the four private players alone control over 65% of private life market and while other 19 put together hold 35%. The state-run LIC still enjoys close to 70% of the market pie.

Here are ten things you need to know about it

1) The merger of HDFC and Max Financial's life insurance businesses will make the combined entity the biggest private life insurer with a combined asset base of Rs 1.1 lakh crore. 

2) The 25,500-crore entity under the HDFC Life banner will be created by a multi-stage share swap deal with 3:7 share swap. Which means, a Max shareholder will get three HDFC Life shares for every seven in an old share deal.

The merger is arrived at through a composite scheme of arrangement under which the life insurance business of Max Financial Services, currently held as Max Life, will be demerged into HDFC Life.

3) The combined HDFC Life entity will hold 10.8% (up from 6.5% now and Max life has 4.3%) of the market, and with an AUM of Rs 1.10 lakh crore, replacing ICICI Prudential which currently is the largest private sector player.

"As per the agreed valuation and exchange ratio, the relative valuation of HDFC Life and Max Life will be 69% and 31% respectively," the companies said.

4) The Max Group will also get an Rs 850 crore non-compete fee for not entering the life insurance business for the next four years.

"The term of non-compete clause will be four years since the payment of an upfront fee of Rs 501 crore which will be payable post completion of the proposed transaction. This will be followed by three equal annual instalments totalling Rs 349 crore, taking the total fee to Rs 850 crore," the companies said.

5) Post-merger, HDFC Life will become a publicly traded company, said HDFC chairman Deepak Parekh.

6) He expects the merger will be completed in 12 months.

"We will proceed with the regulatory filings and I expect the merger to close in 12 months. The merger will make our consolidated market share 10.8% with an AUM of Rs 1.10 trillion," Parekh said.

7) The merged entity will command a valuation of over Rs 65,000 crore, HDFC Life managing director and chief executive Amitabh Chaudhary told reporters.

8) Post merger, HDFC will hold 42.5% in HDFC Life, Standard Life will continue to hold 24%, Max Group will have 6.6% stake in the company. Other shareholders, Axis Bank and PES will collectively own the rest of the shares.

9) After the merger, the new company will have 601 branches (HDFC Life's 398 and Max's 211) and 23,620 employees (HDFC over 15,100 and 8,780 at Max) at the present combined head count.

Terming the deal as a long-term value creation for shareholders of HDFC Life, Parekh said Analjit Singh and his team have created a strong and robust team following a strategy of consistent and strong growth to create value for both shareholder and policy holders.

The deal: 

For the merger of Max Life into Max Financial Services, shareholders of Max Life will get one share of Max Financial Services for every 4.98 shares of Max Life.

For demerger of the life insurance undertaking from Max Financial Services into HDFC Life, shareholders of Max Financial Services (post the amalgamation with Max Life), will get 2.33 shares of HDFC Life for each share of Max Financial Services.

Earlier, HDFC and Max groups had entered into an "agreement to evaluate a potential combination through a merger of Max Life and Max Financial into HDFC Life through a scheme of arrangement".

As per reports, insurance regulator IRDAI had expressed concerns over transfer of liabilities related to businesses other than life insurance to the merged entity, if Max Financial and Max Life were merged into HDFC Life in totality. 

HDFC Life has also entered into a trademark licence agreement to use the Max brand as part of life products that will transition from Max Life, for seven years post merger.

Before the merger of Max Life with HDFC Life, Max Life will be demerged from Max Financial Services and subsequently Max Financial Services would be merged into Max India.

As of March 2016, HDFC Life had total premium of Rs 16,313 crore and an AUM of Rs 74,247 crore while Max Life, which is a joint venture between Max Financial Services and Mitsui Sumitomo Insurance of Japan) had a premium income of Rs 9,216 crore and AUM of Rs 35,824 crore.