After the Pre-AGM suggestions concall, IDFC Ltd board finally decided on the option to sell of AMC. This removes a lot of ambiguity on other options like demerging IDFC AMC, getting acquired by some other company etc.
Now the path is super straight forward & Most of the shareholders have clearly mentioned in concall what they want- AMC Sale & Merger with IDFC First Bank.
AMC Sale:
AMC Business was purchased in 2008-2009 @826 cr, if we adjust for cost inflation acquisition cost in 2021 is about 2000cr i.e No tax on sale up to 2000cr.
The expected post-tax amount from AMC Sale could be in the range of 3500 cr i.e 23rs/share
Calculations in below sheet:
Post Sale Journey:
Happy Ending:
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Return some Money to shareholders & Merger:
If the management decided to return some cash to shareholders before the merger, they’ll have to do so in the shortest possible time. The dividend is one way to pass on this cash but since it is taxable at investors’ end many HNIs & Corporates end up paying 25-42.7% tax. on the other hand, Management has the right to approve 10% of net worth(12000cr) to buy back shares without shareholder approval i.e around 1200cr worth shares. incase they take shareholder approval, then they will be eligible to buyback with 25% of their net worth i.e 3000cr.-
Buyback & Merger:
Management was grilled by shareholders on one major point that is stock price return for the past 5 years.Open Market Buyback:
In case management decide to do an open market buyback with 3000cr [Highly unlikely], the stock price will be re-rated very close to its NAV[i.e some 96rs]. This will help many patience shareholders to exit the company with decent returns by paying 10% capital gains on indexed price & for remaining shareholders who wanted to wait for the merger, the NAV will move up from 96rs/share to 105+ Rs/ share thereby improving swap ratio. - A Tax-efficient, win-win way for IDFC stakeholders.- Shareholders waiting for exit can exit asap
- Shareholders wanting IDFC First Bank shares will have a better swap ratio [Since open market buyback will remove shares from the market at below NAV Price ]
- Management will be able to show that they have generated 20+% compounded wealth for their shareholders since demerger.
Tender Offer buyback:
In case Management decides to go with Tender offer buyback, that will give an equal opportunity for all the shareholders to exit at a predefined price and the problem with this method is- Average price of buyback will be higher for the company & shareholders who want to wait for the merger will not have decent upside left.
- Shareholders waiting to exit for the past 5 years will not be able to exit completely & should sell some in tender offer & some in the open market/ wait for the merger.
- Management will not have a provable metric for showing a wealth creation track record.
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Dividend & Merger:
Buybacks typically take 3 Months to close & only 25% of net worth can be returned. In case management feels lazy in appointing an investment bank for the buyback process and decides to go ahead with dividends, Shareholders will have to pay the tax in their respective tax brackets. This is disastrous for HNIs[35% shares]. Many institutions[48% shares] usually don’t care & for small shareholders in a low tax bracket, it doesn’t matter.
Inefficient method of returning cash to shareholders but, the fastest way to do so [Buyback might add 3-4 months lag]
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Buyback, Dividend & Merger:
Since Max buyback can only be 3000cr & requires shareholder approval, management can opt for 1200cr buyback[No shareholder approval] & give out a dividend of 2000+cr [11.5 Rs/share].
This is a bit in-efficient than the buyback method, but shareholders will receive cash as fast as the Dividend method.
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Merger without returning cash:
IDFC First Bank is like a toddler at the moment, It has 25%+ growth ambition in their retail business but their ROE of <5% clearly will not support their growth, so for the past 4 years they have been growing at 25%+ Retail AUM by reducing their corporate & Infra loan book now since the retail has already inched up to 70% of the book, it’s high time for them to have solid equity capital to grow. This requires more T1+T2 capital so, raising funds through fresh equity or long-term debt is the only way for them to boost CAR and grow. Since their balance sheet is already stretched at 8:1 it makes sense for them to raise equity- In fact that’s a more sensible way to grow at the moment.
Since IDFC Ltd is the father of IDFC First Bank & since IDFC FHC the entity which holds AMC & IDFC First Bank shares is going to receive the cash from the AMC sale, instead of moving the Cash from IDFC FHC to IDFC Ltd & to IDFC Ltd shareholders will lead to double taxation so, giving the cash directly to IDFC First Bank makes more sense in terms of tax efficiency.
This scenario [Sale + Merger] is simulated in my earlier post in the forum:
One can plug in the respective swap ratios & sale numbers. Highly likely that the discount rate will be <5%.
This is perhaps the most desired outcome
- long term IDFC Ltd shareholders who wish to take get IDFC First Bank shares will have a better swap ratio.
- IDFC Ltd Management will have Proof of wealth creation- Once the swap ratio is finalized IDFC Ltd will anyways get rerated and start trading close to that ratio.
- IDFC Ltd shareholders willing to exit can exit in the open market once the ratio is announced & price is rerated.
- IDFC First Bank Shareholders will get the growth capital it needs at probably 2x P/B + some benefit in merger discount thereby Book value increase.
- IDFC First Bank Management will have peace of mind for the next 5 years with 3500cr growth capital [15+% of their networth]
Not So Happy Ending:
There are thin chances that Merger option might fail between IDFC Ltd & IDFC First Bank due to disagreement in merger swap ratio between the companies or foundation disposal issues [Super low chances]
- Return cash to shareholders, Sell IDFC First Bank stake & Liquidation:
Returning money to shareholders can be through the buyback & dividend explained above. IDFC First Bank stake sale will be through a tender process where IDFC FHC will be liable to pay 10% capital gains tax on the indexed cost i.e Post-tax of 10kcr.
Final closure will open offer by some NBFC to acquire IDFC Ltd and merger with themselves for the cash held or liquidation etc .
IDFC Ltd shareholders might get their final exit at 55-65rs based on AMC sale funds usage.
This path is highly unlikely to happen, in the worst case IDFC Ltd shareholders will have this as exit value.