Reliance Industries along with an associate group firm is acquiring Bharti Group’s majority stake in two separate general and life insurance ventures with French partner AXA for an undisclosed sum, the company disclosed late Friday.
On the one hand this will mark the end of telecom czar Sunil Mittal’s short tryst with financial services business, billionaire industrialist Mukesh Ambani, who recently announced the group’s entry into financial services business by striking a venture with DE Shaw, will now for the first time be pitched in direct competition with younger brother Anil Ambani’s ADA Group’s business interests.
Bharti Enterprises, the privately held group arm of the Mittals will sell 74 per cent stake each in Bharti AXA Life Insurance Co and Bharti AXA General Insurance Co to Reliance Industries and its associate firm Reliance Industrial Infrastructure Ltd.
The valuation of the deal stands undisclosed for now, but media reports had earlier speculated that Reliance is looking to pick the stake in the life insurance JV alone for around Rs 3,000 crore ($666 million) while Bharti was eyeing twice the amount or around $1.3 billion. The final deal could have been struck within the range.
“This transaction is subject to negotiation and entering into legally binding agreements between Reliance Industries, Reliance Industrial Infrastructure Ltd and AXA and obtaining necessary approvals from IRDA
and other relevant approvals,” Reliance Industries said in a disclosure to the stock exchange. Reliance Industries, the country’s most valued company, lost 1 per cent in its share price on Friday ahead of the deal announcement. Reliance Industrial Infra stock rose 2.43 per cent at BSE.
According to the deal, Reliance Industries and its associate will pick 57 per cent and 17 per cent, respectively, in each of the insurance companies and would become majority partner with AXA in India. While AXA would retain its current 26 per cent stake and continue to manage the operations of both joint ventures, the deal allows it to acquire from Reliance up to 24 per cent shareholding in both the insurance
companies in accordance with the applicable regulations as and when the FDI regulations permit such a holding by AXA.
Existing norms restrict foreign partners in the insurance sector from owning more than 26 per cent in the joint venture.
“Upon exercise of such an option, RIL will effectively own 45 per cent, RIIL will effectively own 5 per cent and AXA the balance 50 per cent in both the insurance companies,” the Reliance statement said.
Bharti's Tryst With Financial Services
Bharti Group that is also scouting for buyers to exit its Indian asset management joint venture with AXA, will in effect completely exit financial services business that it entered around five years ago.
News agencies reported a company statement as saying, “The decision is in line with the Bharti's strategy of focussing its energies and financial resources in businesses where it is making a deeper impact
in India and overseas. At present, the financial services ventures do not fit into Bharti's long-term growth plans.”
Bharti that acquired Zain Telecom’s African assets in a $10.7 billion deal last year is struggling with shrinking margins in its core telecom business but hopes to generate value out of its African buy in the medium to long term. The group also has a retail venture in partnership with world’s largest retailer Wal-Mart. Besides, the group has exposure in telecom hardware manufacturing, education & training and agri business.
One of the reasons why AXA partnered Bharti was its consumer reach given its vast telecom business. This was to be leveraged as the JV tried to break into the underpenetrated Indian insurance market. For the year ended March 2011, Bharti AXA Life Insurance collected premium of Rs 790 crore (~$ 175 million), while Bharti AXA General Insurance scooped gross direct premium of Rs 550 crore ($122 million).
Bharti AXA Life Insurance had total income of Rs 873.2 crore with net loss of Rs 478 crore for FY10.
Reliance Vs Reliance
The deal also means the two Ambani brothers would compete directly. Younger brother Anil’s ADA Group already runs its own life and general insurance ventures under Reliance Capital.
Although a settlement after an acrimonious split between the siblings of the vast business empire created by founder Dhirubhai Ambani, paved the way for the brothers to enter into each others business, insurance will be the first instance where the competition will be direct.
Mukesh Ambani had earlier made his intentions clear by announcing a big bang entry into the broadband or data side of telecom business after almost a year of ending a non compete agreement with Anil Ambani. Incidentally, ADA Group already has a debt laden telecom business that went to the younger brother as part of the family agreement few years ago.
Meanwhile, the proposed deal is also in continuation of the new strategy of Reliance Industries seeking strategic partners for its various businesses. The group had recently struck a multi billion dollar deal with BP for its energy business besides forming the financial services venture with DE Shaw. With AXA, it will have another large international partner in India, as it seeks to enter new businesses funded through its huge cash reserves.