HDFC Life buying Exide Life is “no value accretive” deal
HDFC Life Insurance Company buying Exide Life Insurance Company is an expensive and no value accretive deal, which will not be a game changer as distribution benefits are expected to be limited.
Last week, HDFC Life had announced the acquisition of 100% of the share capital of Exide Life Insurance Company for Rs 6,687 crore. Of this, Rs 725.97 crore will be payable in cash and the balance by way of issue 8.70 crore equity shares at a price of Rs 685 per share to Exide Industries.
The process for the merger of Exide Life into HDFC Life will be initiated on completion of the acquisition.
The deal is not immidieate stock price accretive for HDFC Life, but the sale of life insurance business removes an overhang from valuation’s perspective for Exide Industries.
Exide Life is relatively small in terms of overall APE (Annual premium equivalent) at 8% of HDFC Life APE in FY21.
HDFC Life’s management’s rationale is that the acquisition enhances its agency force and provides geographical diversification.
The point of contention here is, an absolute valuation of Rs 7,000 crore is 2.6x Exide Life’s current EV, which is high for Exide’s stagnating APE over the past five years.
For HDFC Life, the deal could expedite ramp-up of agency by around 35%, expand small-town presence, and lift APE by 8%, private market share by 130 bps and EV by 10%.
Meanwhile, HDFC Life’s solvency is 203% and that of Exide Life is 219%. Once Exide Lifebecomes a 100% subsidiary of HDFC Life, its solvency would fall to 180-190%, but upon completion of merger, solvency might move toward 190-200%.
However, the private sector life insurance player remains a long term investment candidate given its insolvency ratio coupled with the possibility of further improvement in its operating parameters.
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