The fourth largest private sector general insurer HDFC ERGO today said it will acquire its smaller rival L&T General Insurance in an all-cash deal for Rs 551 crore.
"The board of HDFC ERGO General Insurance Company has approved purchase of 100 per cent stake in L&T General Insurance Company subject to regulatory approvals," a company statement said here. Once the approvals are in place, the acquired entity will be merged with the aquirer, it said.
The transaction has been valued at Rs 551 crore in the all-cash deal structured by Arpwood Capita, which advised HDFC ERGO. The acquisition would help the company improve its market position.
The merger process would take about 11 months, it said.
Once the deal goes through, this would be the first ever merger of two insurance companies.
HDFC ERGO is a 51:49 joint venture between mortgages major HDFC and ERGO International of Germany, which is part of the Munich Re Group, and is the fourth largest private sector general insurer in the country.
It offers all lines of general insurance products, including motor, health, personal accident, home, fire, marine, aviation, liability and crop insurance.
In fiscal 2016, it wrote gross premiums of Rs 3,467 crore and made a net profit of Rs 151 crore. It operates through 108 offices and employees a little over 2,000 staff.
L&T General Insurance is a wholly owned subsidiary of engineering conglomerate Larsen & Toubro, and was set up six years ago. During the 2016 financial year, its gross premium stood at Rs 483 crore, up 40 per cent over the previous year.
It has 28 offices and over 800 employees.
"Considering the importance of scale in the insurance business, consolidation is inevitable. This transaction marks the beginning of this consolidation process," said HDFC Ergo Chairman Deepak Parekh.
"The acquisition will help us further strengthen our presence in the market. The combined size and expertise will result in improved cost efficiencies in the merged entity and benefit policy holders and other stakeholders," he added.
Meanwhile, HDFC, in a separate statement said, it has agreed to sell 12.33 crore equity shares of Rs 10 each of HDFC ERGO, representing 22.902 per cent of its paid-up share capital, to ERGO International at a price of Rs 90.973 per share, aggregating to a consideration of Rs 1,122 crore.
HDFC said it has concluded the transfer of the said shares at the price as stated above resulting in a pre-tax profit of Rs 922 crore. As HDFC Ergo is an unlisted entity, the capital gains tax on the sale of shares is Rs 197 crore, resulting in a post-tax profit of Rs 725 crore.
As a result of the sale of shares, HDFC's holding in HDFC Ergo comes down to 50.73 per cent, while that of Ergo rises to 48.74 per cent.