Cashing In

The HDFC Life-Max Life merger ticks the right boxes for both promoters


It took just half a minute for Deepak Parekh to say yes when asked if he was willing to merge his life insurance business with Max Life. Sitting in a closed door meeting with investment banking firm, Arpwood Capital, in mid-May this year, Parekh, HDFC’s chairman, was right in the middle of another deal when this idea was proposed. In barely a fortnight, HDFC Life would buy L&T General Insurance for Rs.551 crore, signalling its intent to grow the business. 

The life insurance deal stitched in India by the top brass of HDFC Life and Max Life in conjunction with the bankers, would require just one meeting between Parekh and Analjit Singh, founder, Max Group. That was in London in the first week of June, a city where Singh spends a large part of his time. On June 17, the two men, along with their senior team, addressed the media at a five-star hotel in central Mumbai to announce they were in talks to merge their life insurance businesses. The combined entity would have assets under management of Rs.110,000 crore, with a market-share of 23.9%, making it the largest life insurance player, pipping ICICI Prudential Life. This would be the first M&A deal in the life insurance sector since 2005 when Anil Ambani’s Reliance Group bought over AMP Sanmar for Rs.100 crore.

It would also be a marriage of convenience. For Singh, a serial entrepreneur, and his foreign partner, exiting the business was on the agenda. Parekh, on the contrary, has been keen to grow his insurance business and take it right to the top. 

What gives?

And taking the inorganic route is something that Parekh has done in banking and mutual funds by acquiring Times Bank and Centurion Bank and through the buyout of Morgan Stanley’s business respectively. The deal with Max Life gives him a strong agent network, an established bancassurance model – via’s Max Life’s tie-up with Axis Bank, and a strong presence in north India. In contrast, HDFC Life’s forte is the west, while its agent business is not strong. The merger, thus, covers its weak links besides bringing in scale.

According to Nitin Chopra, former CEO, Bharti AXA Life Insurance, scale for a life insurance company has two dimensions – one is for servicing existing policy holders and the other is towards writing new business. In the first case, a reduction in servicing costs is possible by deriving synergies in technology, employee productivity and maximising the use of existing infrastructure costs. “In a merger, all these become better and lead to a reduction in policy holder costs. There will also be lower management costs as the organisation is expected to be right-sized to fit the combined entity,” he says. 

When it comes to gathering new business, the benefits will accrue as a result of distributing its fixed marketing and distribution costs over a larger business. “This will reduce the cost per policy. In a merger, this takes the shape of enhanced brand presence, a more diversified product range and better channel productivity,” points out Chopra.

Sorting it out

From Max Life’s point of view, the pain point has been Mitsui Sumitomo, the Tokyo-based insurance company, which holds a 25% stake in the insurer. It had acquired the stake in 2012 from New York Life and Max, both of whom had made handsome returns. Now, Mitsui Sumitomo wants to call it quits and is banking on this merger to do just that. By the looks of it, the new entity, which is likely to be called HDFC Life, will eventually have a shareholding that is similar to the one at present. The only difference is that it will be a listed company with minority shareholders like Axis Bank and Wipro founder, Azim Premji, through his private investment arm. 

While Max Financial, the company that runs the insurance business, has a market capitalisation of Rs.13,400 crore, HDFC Life’s valuation could be around Rs.19,000 crore. This is based on a deal struck in August last year when HDFC sold a 9% stake in the insurance company to Standard Life for Rs.1,700 crore. The merger, as Parekh said to the media, will not necessitate an IPO for HDFC Life, which was the earlier plan. All eyes are therefore on the swap ratio for the merger and the consequent shareholding. 

That could mean a big payoff for Singh, who has now made it a habit of selling his businesses at top dollar valuation. An inkling of the same – that he was open to exiting life insurance – was evident in the middle of January this year when Max India split into three business verticals. Max Financial Services, a new entity, would focus only on life insurance, Max India would oversee health and Max Ventures & Industries would be in charge of speciality packaging. This development would have been routine except for the fact that Max Financial became India’s first listed insurance company by the virtue of its 68% holding in Max Life Insurance, with the rest held by Mitsui Sumitomo & Axis Bank.

More money

And Singh has learnt a thing or two from his telecommunications experience, a sector where he made money at every point. In 1998, he sold his 41% holding in Hutchison Max, the company that ran the Mumbai cellular services operation, for an impressive Rs.561 crore, even before the telecom boom had begun. This was after his radio paging business was swamped by the cellular business. In the ensuing years, Hutchison Max grew to become the second largest player in the business. “The lesson for him was never to exit a business completely. He rarely got the timing wrong after that,” says a former Hutchison executive. In 2006, Singh invested back in the same company, now a much larger Hutchison Essar, and exited in parts making a return said to be in excess of 4x.

In Max Life, Singh has invested about Rs.500 crore so far. Assuming the above mentioned valuation holds for the two companies, Singh will yet again end up making a cool 4.7x on capital invested.