Shriram Group has finally announced much awaited restructuring of your financial services business. On Monday evening, the company said that Shriram City Union Finance (SCUF) and Shriram Capital (SCL) will be merged with Shriram Transport Finance Company (SHTF) to form the proposed entity Shriram Finance. On the other hand, its non-lending subsidiaries, including its general insurance and life insurance businesses, will be excluded from the merged entity.
This is a share swap deal, in which the shareholders of SCUF will receive 1.55 shares of SHTF for every SCUF share. Shareholders of SCL will receive 1 share of SHTF for every share held by SCL in SHTF. Simply put, shareholders in SCL will get shares of the underlying entities in proportion to their holdings, said analysts at Emkay Global Financial Services. At the time of the announcement, the swap ratio offered a 13% premium for SCUF shares, Emkay’s report added.
As per the management of the company, the total cost related to the merger should be approx. 400 crores, which will be realized in the next two years. This cost includes approx. 190-200 crore stamp-duty duty, 60-70 cr of HR integration cost and Marketing cost of 70 crores. It should be noted that this cost will be paid in advance. Adjusted for merger costs, the company’s management has guided for approximately 14% incremental profit on profit after tax levels for the two years following the merger.
While the company’s management appears to be full of optimism, that is not the case with investors. Reacting to the announcement, shares of Shriram Transport and Shriram City Union Finance fell over 6% each intraday on the NSE on Tuesday. With this, the former was the biggest loser among securities traded in the F&O segment.
What is bothering investors?
Analysts at HDFC Securities Ltd said in a report, “While the re-jig was inevitable, we believe that the proposed merger is unlikely to generate meaningful revenue or OPEX profit, and see significant execution in the Super-App strategy.” Risk is involved.” Despite the high probability, our forecast for FY22-FY23 remains unchanged, in case of regulatory approvals, the domestic brokerage house said.
Analysts at Kotak Institutional Equities do not get direct near-term synergies due to the diverse lines of business of these entities. “The focus on productivity following a business transition will provide upside over time,” Kotak analysts said in a December 14 report.
Apart from synergy gains, another downside risk to this proposed merger comes from a potential stake sale by Piramal Enterprise Ltd and TPG, which own 8.47% and 2.6%, respectively, in the merged entity.
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