Stakes too high in Nippon Life-Reliance MF deal?

According to a press release filed with the BSE, Reliance Capital AMC has sold 26 per cent stake to Nippon Life Insurance Company in a deal for Rs 1,450 crore. The deal which values Reliance Mutual Fund at 6.8 per cent of its AUM of Rs 82,305 crore is said to be one of the largest in any asset management company till date.
 
The street believes the valuations to be rich and fair given Reliance Capital is one amongst the leaders and can claim high equity allocation strategies. As a result of the positive development, the scrip has rallied by around 38 per cent on YTD basis, as against an 8 per cent rally by the Sensex.

However, we at DSIJ would like to urge our readers to pay closer attention to the current valuations and compare the same with the previous deal with Eton Park in the year 2007. The valuations for this deal are a far cry away from what Eton Park had paid to acquire just 5 per cent stake in Reliance Mutual Fund, which was Rs 501 crore. At that time, the business of Reliance MF was valued at Rs 10,000 crore, which was 13 per cent of its then AUM of Rs 77,764 crore.

Today, Nippon Life has had the benefit of acquiring 26 per cent of Reliance MF’s AMC business for Rs 1,450 crore in a deal that valued the target company at Rs 5,597, merely 6.8 per cent of its current AUM of Rs 82,305 crore. Hence one can notice that over the past 3-4 years, Reliance MF’s business value has eroded quite a bit and scaled down to almost half its size whereas the AUMs have witnessed stupendous growth.

Moving on, we have compiled a table of all the major MF acquisitions in the recent past and sorted them in a descending order of ‘value of business as percentage of AUM’. Based on the findings, one can observe that the Eton-Reliance MF deal has been the most expensive one in recent times.
 
In fact, the Nippon acquisition of Reliance MF also seems to be very high when compared to other deals, where the acquirers have bought higher stakes in target companies for lesser value. Hence though the streets seem to be cheering this deal, we are not very comfortable with such high valuations. Let’s not forget that Reliance MF has just recently lost more than 20 per cent of its AUM and its market share has also come down from 14.2 per cent to 12 per cent. If we watch the performance of the shares of Reliance Capital on BSE between these two deals, the counter has lost more than 86 per cent of its value.