HDFC buys out Reddys from Apollo Munich Health for Rs 1,347 cr; deal likely to be closed over next 9 months

Mumbai: Mortgage major HDFC on Wednesday agreed to acquire Apollo Hospitals Group’s entire 50.8 percent stake in Apollo Munich Health Insurance for Rs 1,336 crore and also the 0.4 percent stake held by a few employees for Rs 10.84 crore. The deal, valued at Rs 1,347 crore, and subject to regulatory and shareholder approvals, is likely to be closed over the next nine months. The merged entity (with HDFC Ergo General Insurance) will be a Rs 10,807-crore business as of today’s individual business, making it the second-largest. At Rs 1,336 crore or Rs 73 a share, the deal gives over four-times premium to the Reddys, the promoters of the Apollo Hospitals group which had invested Rs 300 crore into the joint venture since 2006. If the deal materialises–HDFC in 2016 unsuccessfully announced a takeover of Max Life–will help the company scale up and move towards an eventual public offering. In Apollo Munich Health, Munich Health, the health business arm of Munich Re, owns 49 percent and Ergo International AG, another subsidiary of the German major, owns 49 percent in HDFC Ergo since 2008, the general insurance arm of the mortgage major. [caption id=“attachment_4010567” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] HDFC chairman Deepak Parekh told reporters that the deal has two steps-HDFC first acquiring 51.2 percent in Apollo Munich Health and then merging it with HDFC Ergo. Post-acquisition, Munich group’s stake in HDFC Ergo will continue to be at 49 percent, Parekh added. Explaining the deal structure, he said, “if HDFC Ergo had taken directly the shares of Apollo Group then the combined holding of Munich Re will exceed 49 percent as they already own 49 percent in HDFC Ergo, and a similar quantum in Apollo Munich Health as well. “So, that structure was not possible because of the 49 percent FDI cap, and so we had to do this acquisition in this manner that we first take 51.2 percent and then merge the two,” Parekh told reporters. He said based on the acquisition price of Rs 1,347 crore for 51.2 percent equity stake, the combined entity will have a value multiple of 1.2 times the gross written premium in FY19 of the both the entities. Apollo Munich Health chairperson and Apollo Hospitals Enterprise vice-chairperson Shobana Kamineni said the deal will help her group de-leverage the balance sheet. The group has invested Rs 300 crore in Apollo Munich Health between 2006 till now, she added. Under the deal, Kamineni said Munich Health will pay Rs 294 crore to Apollo Hospitals Enterprises and Apollo Energy towards termination charges for exiting the joint venture. Parekh also said the merger with HDFC Ergo will create a strong health insurance franchise with combined gross direct premium of Rs 10,807 crore. “The acquisition will make HDFC Ergo the second largest private insurer in both accident and health insurance (8.2 percent) and health (7.2 percent),” Parekh said, adding the combined entity will have a market share of 6.4 percent as against the standalone market share of 5.1 percent that HDFC Ergo has now. He also assured that all the employees of Apollo Munich will be retained post-merger. Apollo Munich has an agency network of over 70,000, while HDFC Ergo has 122 branches with minimal agents. When asked about listing of HDFC Ergo, Parekh said the acquisition is a step towards it. “First we have to merge and make it scalable. If it will have scale then we will do an IPO. This is one step towards the IPO which we will plan maybe two years later. We are not thinking of an IPO in 2019 or 2020,” he explained. While the acquisition will require approvals by NHB, Irdai and the Competition Commission, the post-deal merger will involve the companies getting approvals from shareholders, NCLT, and a final approval from the Irdai. It can be noted that HDFC’s bid to take over Max Life did not go through after it failed to get the regulator nod as the Insurance Act does not allow merger of an insurance firm with a non-insurance company. The deal was announced in late 2016 and was called off in August 2017.