DHFL Auction: Piramal Enterprises takes edge over Oaktree

Even as Oaktree emerged as the highest bidder for Diwan Housing Finance Ltd (DHFL) in terms of value, Piramal Enterprises has edged out rival suitor Oaktree Capital in the auction to purchase the assets of Diwan Housing Finance Ltd (DHFL) as Piramal offers at least Rs 1,000 crore higher upfront payment than US asset manager Oaktree for DHFL in the fourth round of auction.

Piramal Enterprises, a diversified conglomerate, offered Rs 12,700 crore as cash upfront trumping the Rs 11,646 crore offer from American asset manager Oaktree. Piramal and Oaktree trumped Adani Properties, the remaining suitor in the fray, in the fourth round of bids on Monday.

Oaktree Capital has offered Rs 36,646 crore for the entire DHFL business compared with Piramal’s Rs 35,550-crore bid. But Piramal holds the advantage in the auction due to two vital factors, according to the people cited above.

The Deal

One, lenders led by State Bank of India prefer the higher upfront to the extent of over 1,000 crore by Piramal. “As part of the request for resolution plans (RFRP), the committee of creditors (COC) has shared a (purely objective) scoring grid. This is a weighted average of the upfront cash amount and the net present value (a measure of an enterprise’s profitability) offered by each bidder. Piramal bid scores highest on this quantitative score,” said a person with direct knowledge of the auction.

The CoC, which is due to meet on Friday to evaluate the bids, is likely to favour the upfront cash component because the Insolvency and Bankruptcy Code (IBC) emphasizes the principle of maximization of value, said this person.

Two, Oaktree’s proposed takeover of DHFL’s insurance business—DHFL Pramerica Life Insurance— is complicated because it is a foreign entity, potentially inviting the gaze of insurance regulator IRDAI. Oaktree Capital would have to contend with 49 percent FDI insurance restriction in the takeover of the insurance unit because 49 percent of DHFL Pramerica Life Insurance is already owned as foreign investment by Prudential International Insurance Holdings Ltd.

Insurance Companies (Foreign Investment) Rules, 2015 issued by the IRDAI require Indian insurance companies to be owned and controlled by Indian residents and/or citizens at all times. In other words, no foreign entity can own the DHFL stake in DHFL Pramerica Life Insurance.

Under these circumstances, Oaktree’s resolution plan cannot be implemented until the matter of foreign ownership in DHFL Pramerica Life Insurance Ltd is resolved. In a nutshell, the implementation of the Oaktree plan is conditional on such a sale. IRDAI officials have already communicated the above position to the COC, said another person familiar with the matter.

Piramal as an Indian entity has no such problems. Its bid offers a clean solution whereby either the entity can be sold by lenders through an open process, and in cases, it fails, can be bought by Piramal for a pre-specified sum.

No foreign bidder can offer this certainty. And any potential structure (say, an intermediary fund) would need explicit IRDAI approval.

Additionally, Oaktree’s plan proposes a holdback component of Rs 1,500 crore to meet contingencies arising on account of investment in DHFL Pramerica Life Insurance Ltd. This holdback is proposed to be carved out from the amount belonging to financial creditors and is allegedly in gross violation of the RFRP (request for resolution plans), according to another person cited above.

“Further since the holdback is for an indefinite period, the same should not be considered for the NPV (net present value) calculations and should be ideally excluded from the upfront cash payment,” this person added. To be sure, the NPV, equity participation and upfront cash component are part of the scoring criteria of the CoC.
Piramal also has other factors working in its favour in the bid for DHFL.
The Indian company’s bid is unconditional, and does not have built-in options for revoking the bid, or revoking pricing at a later date etc, said another person familiar with the company’s plans for DHFL.

The Piramal bid purposes to merge its financial services business into DHFL, he said. “This makes available over Rs 10,000 crore of equity for growing and investing in this business. Compared to this, the competing bid offers Rs 1 lakh.”

The Oaktree bid asks lenders to keep aside Rs 1,500 crore of its own money in an escrow, to cover for any potential outflow that might arise for them related to the insurance business. “In effect, this is a reduction in the actual upfront cash they are bringing in. If this is removed from their bid, the Piramal bid has a higher NPV as well, this being superior on all dimensions,” the person cited above said.

This person said Piramal bid for DHFL on a going concern basis, intending to invest in and grow the business. The bid promises that the employment of staff will be protected, and the business grew. It is not a bid that loads a lot of debt on the entity, strips out assets, and creates financial returns for distressed sector investors, according to him.

If the plan is not approved and/or implemented by March 31, 2021, and if there is any deterioration in the assets of DHFL, Oaktree has reserved the right to discuss re-pricing of the commercial terms of its resolution plan with the COC.

Loose-ends

That’s not all. The Piramal bid specifically takes care of retail FD holders. What this means is that once the COC members decide on the allocation of the total consideration they receive from the auction, whatever they allocate to FD holders, Piramal has committed to top up another 10 percent on top of that, out of their own pocket (over and above the total bid amount). In contrast, Oaktree has not specifically kept aside money for FD holders.

“As a domestic suitor, Piramal group may have a smoother path to acquire the DHFL business. Their offer seeks only mandatory regulatory approvals from the CCI, NCLT and RBI and is otherwise unconditional. Significantly, the plan also mentions that in case DHFL Investment Ltd’s shareholding in DHFL Pramerica Life Insurance Ltd cannot be divested, the Piramal group is ready to buy it from them for around 300 crore,” said a fourth person cited above.

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