Aviva stake buyers walk out of negotiations over valuations

MUMBAI: Birla Sun Life, HDFC Life and Max Life, potential buyers of Aviva Plc’s stake in its Indian life insurance venture, have walked out of negotiations, at least temporarily, citing high valuations and the future of the Burman family in the venture who are majority owners, said two people familiar with the development.

“The talks have stopped completely,’’ said the chief executive of one of the three companies which was negotiating. This does not mean that negotiations would not resume, or that the deal is off, he said preferring anonymity.

Apart from the steep valuations that Aviva was seeking, similar to other deals at about three times the embedded value of the company, the post acquisition synergies were not visible given that the Burman family does not intend to exit the venture. JPMorgan and Deutsche Bank were mandated for the transaction.

Analysts expect valuation of the company to be around Rs2,200 crore to Rs2,500 crore. “The Burman family was never selling its stake,’’ Mohit Burman, director of Dabur said in an e-mail response. “Only Aviva was contemplating an exit.”

International insurance companies are slowly exiting Indian market due to the slow pace of regulatory clearances for higher stakes for them in the local venture. Although the government has raised their holding to 49%, from 26% earlier, the riders on management and other issues such as clubbing of portfolio ownership has made the proposition unattractive.

Aviva India’s embedded value, i.e., the present value of future profits is at Rs1,800 crore, calculations as per regulatory filings show.

Despite the closed nature of the life insurance market, many long-term investors have been upbeat about the prospects by buying stakes at steep valuations. New York Life sold its 26% in Max New York Life to Mitsui Sumitomo for Rs2,731 crore, at three times the embedded value. Reliance Life sold 26% to Nippon Life atRs2,948 at a similar valuation.

Aviva India ranks 13th on the table, with its total premium income falling 11% last fiscal to Rs2,140 crore. It had an equity share capital of Rs2,005 crore as of March 2013. Though Aviva India’s financials and rankings did not support the valuations the seller was seeking, its distribution channel, a key for fledgling insurers, was attractive for potential buyers.

It sells insurance through IndusInd Bank, RBS and Punjab & Sind Bank and more than 30 cooperative banks and regional rural banks which gives it access to millions of customers across the country unless many which do not have any tie up with banks. It has a distribution network of 134 branches spread across nearly 1,000 towns and cities.

The valuation may also be affected because of the desperation of the UK firm. That was evident in the last such transaction involving ING, the Dutch group, desperate for capital, sold its local venture stake at a loss. ING sold its 26% stake at a loss to joint venture promoter Rajan Raheja of battery maker Exide Industries for Rs550 crore, a loss of a quarter of its investment.