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CORPORATE FRONT: M&A Must Centurion Bank on TCFC? No, despite Chairman Dev Ahuja's desire, if the finance company will prove only to be a liability. By Roshni Jayakar
Sure, there's more to his decision to sell TCFC's leasing and hire-purchase businesses to the Centurion Bank, which is also part of his group, although it isn't obvious. Not only is the proposed deal complex, it is also clever-like Ahuja himself. First, TCFC will spin off Rs 70 crore of its strategic investments into a new company that will, probably, be christened TCFC Investments. That will include:
Then, TCFC's shareholders-only 37.30 per cent of its Rs 17.50-crore equity is held by Ahuja (who controls 80 per cent of the promoters' holdings), V.S. Srinivasan (who used to work with Ahuja at Citibank), and S.S. Kulkarni-will be issued shares in the new company in the same proportion as in the old. That will leave the rump TCFC with its operating businesses, comprising leasing (which contributed 36 per cent to TCFC's turnover) and hire-purchase (including consumer- and truck-finance, this contributed 38 per cent to TCFC's turnover in 1997-98). All of which will be acquired lock, stock, and liabilities by the Centurion Bank (No. 16 on The BT Best Banks '98 Scoreboard). And, based on the recommendations of two independent audit firms, N.M. Raiji & Co. and Ratan Mama & Co., the bank will pay the shareholders of TCFC in cash, bonds, or shares, or a combination of all three. In the process, TCFC will cease to exist. Sums up Ahuja: ''If this proposal is approved by the Reserve Bank of India (RBI), my dream will come true.'' Which was always to convert TCFC into a bank. However, the laws in 1993 did not permit commercial banks to have leasing and hire-purchase operations; they now do, and the RBI is, therefore, likely to clear Ahuja's proposal too. Ironically, the bank that Ahuja floated to fulfil his dream of being a private banker is now bailing out the NBFC that funded it. Undoubtedly, the industrial downturn has hurt TCFC. While its disbursements in the year ended December, 31, 1997, remained at the previous year's level of Rs 312.54 crore, at Rs 17.88 crore in 1997, TCFC's net profits were 17.83 per cent lower than the Rs 21.76 crore in 1996. In fact, it not been for the receipt of a non-recurring, non-operational income of Rs 32 crore from the $178.17-billion General Motors Acceptance Corp.-with which it has floated a auto-finance joint venture, gmac-20th Century Finance Corp.-as a non-competing fee, TCFC would have made a net loss of Rs 14 crore that year. Axiomatically, TCFC's only profitable business also disappeared into the joint venture. Thus, this deal presents Ahuja with the perfect escape-route. Ask him if this is nothing but a bailout for TCFC-and he retorts: ''We are only moving with the times.'' That begs the key issue of whether the Centurion Bank will become stronger because of this strategy. Everything depends on the quality of TCFC's lease- and hire-purchase assets, which were valued at Rs 601.06 crore in 1997. While the lack of disaggregated data makes it difficult to pinpoint the proportion of them that is non-performing, TCFC's balance-sheet for the year ended December 31, 1997, shows that its provisions for Non-Performing Assets (NPAs) and debts written off rose from Rs 2.64 crore in 1996-97 to Rs 8.24 crore in 1997-98. Warns Sankar Raman, 36, Senior Vice-President, L&T Finance: ''In today's economic conditions, even the npas of reasonably-run companies are in the range of 5 to 10 per cent.'' Worse, in August, 1998, the Credit Rating Investment Services of India downgraded its rating of TCFC's fixed-deposit programme from faa+ to fa+, citing that the lower ''rating reflects the decline in disbursements in corporate- and truck-financing business, difficult business conditions, and consequent pressures on TCFC's profitability.'' So, the Centurion Bank could be being forced to take TCFC's troubles onto its books. However, since both are part of the same group, this valuation exercise will be under close scrutiny. Warns Sanjay Jain, 29, Analyst, HSBC James Capel: ''Proper pricing, and the ability to recognise loss-making assets will be crucial.'' Counters Ahuja: ''We will not be passing on dead wood to the bank. Centurion Bank will inherit assets priced at their Net Asset Values derived after taking NPAs into account.'' On the other hand, transferring these assets to the bank will allow the promoters to lower the amount required to be set aside for TCFC's bad debts. Explains Mahesh Thakkar, 40, the Executive Director of the Association of Leasing & Financial Service Companies: ''For npas over 12 months old, a bank's provisioning requirements are much lower than those of an NBFC.'' Still, the Centurion Bank will have to cope with the higher cost of TCFC's funds. For instance, its fixed deposits of Rs 296.17 crore cost TCFC 13 per cent per annum-higher than the bank's 8-10 per cent. However, Ahuja does have a way of countering this. ''If the RBI permits, we will give our depositors the option of withdrawing their deposits at the time of the acquisition. Those who want to continue will have to renew them at the rate that the bank offers,'' he says. While that sounds safe for the bank, the RBI may not agree, particularly as it could pose contractual problems. Of course, the Centurion Bank does stand to gain in some ways from the acquisition of TCFC. Argues D.N. Ghosh, 65, Chairman, Centurion Bank: ''We are in favour of the Narasimham Committee's recommendations on consolidation for stability. That's why both companies are looking at synergising their operations while opening up new vistas of opportunity for the bank.'' Indeed, the Centurion Bank's access to low-cost funds, coupled with the potential for growth in the retail financing business, does provide a firmer foundation for a consolidated operation. Adds Ahuja: ''This will strengthen the business-mix of the bank, reduce its cost of funds, achieve economies of scale, and, at a single stroke, establish an all-India presence for the bank.'' He's right-mostly. Sure, the takeover will enrich the bank's portfolio, which consists mainly of corporate- and trade-finance products, besides asset management, today. Moreover, once the auto-finance business picks up, it should provide cover to the bank's priority-sector financing requirements. And the Centurion Bank's 32-branch, 29-atm network will definitely benefit from TCFC's 54-location grid, of which 6 are in semi-urban areas. That's why Ahuja is eagerly awaiting the RBI's approval even as predators-he confesses that GE Capital Services has already approached him-circle around. If he pulls it off, not only will Ahuja be able to protect his investments in his companies, he will also delight TCFC's shareholders. Given the potential gains, therefore, the 20th Century merger could turn out to be the deal of the 20th Century. |
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It may have outlived its
nomenclature. Since there are barely 28 months to the end of the 20th Century, Davendra
Ahuja, the 60-year-old CEO of the Mumbai-based 20th Century Group (1997-98 income: Rs
2,500 crore), says that he has, obviously, at least one good reason to wind up his
flagship, 20th Century Finance Corporation (TCFC). 