In the first major sign of consolidation in life insurance in India, HDFC Life picked up Exide Life for a consideration of Rs.6,687 crore. Here is why this deal will make a lot of sense to both parties.
How will the deal be structured
It will be a stock cum cash deal in which HDFC Life will issue 8.702 crore shares of HDFC Life to Exide Industries at Rs.685 per share valued at Rs.5,961 crore. In addition, HDFC Life will also pay cash consideration of Rs.726 crore to Exide Life, taking the total value of the deal to Rs.6,687 crore. As a result of this deal, Exide Life will now become a part of HDFC Life and will cease to exist as a separate entity. It helps HDFC Life to substantially expand its presence.
There is a macro logic too
There are two strong driving forces for the deal. Firstly, the overall penetration of life insurance in India is very low. The current penetration level at 2.82% is way below the comparable levels in rest of Asia; leave aside the developed world and this deal positions HDFC to better tap that opportunity. Secondly, the deal also puts HDFC Life in a better position vis-à-vis LIC, the PSU giant with over 68% market share. With LIC likely to tap the IPO market this year, HDFC Life has to keep its counter-strategy ready. The acquisition, being inorganic, helps HDFC Life to expand its all-India reach at a fairly reasonable cost of purchase.
What is in it for HDFC Life
Apart from the macro advantages that we just discussed, there are some very specific advantages that HDFC Life gets from this acquisition of Exide Life. First, Exide has a strong position in South and this deal will give HDFC Life a ready and steady market in the fast-growing South region. In addition, there is the captive customer base of Exide Life that HDFC is able to acquire. Exide life has about 12 lakh customers and assets under management of Rs.18,800 crore. This directly adds up to the customer stack of HDFC Life. Also, the annual premium income of Rs.3,325 crore of Exide Life adds heft to the top line of HDFC Life.
How does Exide Life benefit?
There are two beneficiaries here viz. the business of Exide Life and the value for Exide Industries. Exide Life gets a much bigger balance sheet, which is essential to the growth and dominance in the life insurance industry. Secondly, Exide gets a total consideration of Rs.6,687 crore from the sale of its stake in Exide Life. That is approximately 4 times the total outlay that Exide made for the insurance business till date. Overall, that is a good deal by comparable benchmarks for life insurance business. The 10% cash flow can be used by Exide to reinvest in its core battery business. The 90% pay-out in HDFC Life stock will ensure that Exide is still invested in life insurance. That is a major positive for Exide Industries!