HDFC Life to merge Max Life, Analjit Singh to pocket Rs 850 crore non-compete fee

Signalling more consolidation in the cluttered life insurance space, HDFC and Max groups on Monday decided to merge their life insurance businesses to create the biggest private life insurer with combine asset base of Rs 1.1 lakh crore in a complex multi-stage share swap deal.

Under the merger deal, 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 boards of HDFC Life, Max Life, Max Financial Services and Max India today decided to amalgamate their businesses to create a Rs 25,500-crore entity under the label of HDFC Life through a 3:7 share swap under which a Max shareholder will get three HDFC Life shares for every seven in an old share deal.

The merger will make HDFC Life the largest private sector life insurer with close to 10.8 per cent (up from 6.5 per cent now and Max life has 4.3 per cent) and with an AUM of Rs 1.10 trillion, replacing ICICI Prudential which currently is the largest private sector player. HDFC chairman Deepak Parekh said post-merger, HDFC Life will become a publicly traded company and he expects to complete the merger process over the next 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 per cent with an AUM of Rs 1.10 trillion," Parekh said. The merged entity will command a valuation of over Rs 65,000 crore, HDFC Life managing director and chief executive Amitabh Chaudhary told reporters. 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.

"As per the agreed valuation and exchange ratio, the relative valuation of HDFC Life and Max Life will be 69 per cent and 31 per cent respectively," the companies said. Post merger, HDFC will hold 42.5 per cent in HDFC Life, Standard Life will continue to hold 24 per cent, Max Group will have 6.6 per cent stake in the company. Other shareholders, Axis Bank and PES will collectively own the rest of the shares. 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.

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.  Asked about overlapping of key employee positions post-merger, Chaudhari said there could be some issues on this but "our intention is to retain talent as much as we can and create growth opportunities".

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

As a part of the deal, in consideration of the non-compete and non-solicitation obligations undertaken by the Max Group promoters, the merged insurance entity will be paying a non-compete fee worth Rs 850 crore to the promoter group of Max Financial Services. "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 totaling Rs 349 crore, taking the total fee to Rs 850 crore," the companies said.

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. HDFC and Standard Life Mauritius Holdings will continue to be the promoters of the merged HDFC Life and HDFC will cease to be the holding company of HDFC Life post-merger but will hold 42.5 per cent in the company. The proposed transaction needs to be approved by the shareholders id HDFC Life, Max Life, Max Financial Services and Max India apart from regulatory approvals from Irdai and Sebi and the courts.

Before the merger, Max Life will merge into Max Financial Services, followed by a demerger of the life insurance undertaking from Max Financial Services into HDFC Life (ie, the merged insurance entity). Then there will be a merger of Max Financial Services (holding the residual business) 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.

The Edinburgh-based Standard Life holds 35 per cent stake in HDFC Life, in which HDFC owns 61.63 per cent. For HDFC, this will be the second merger announcement this month after HDFC Ergo General Insurance announced takeover of 100 per cent stake in L&T General Insurance.

Owing to the Max deal, which would involve swap of shares without any cash changing hands, HDFC Life has put on hold its proposed IPO. Max Life is a joint venture with Mitsui Sumitomo Insurance Company. Max Financial owns 68 per cent stake in Max Life, while Mitsui Sumitomo owns 26 per cent.