Mergers and Acquisitions

Assignment
(Trimester V)

Analysis of Piramal Group’s acquisition of DHFL

Submitted to:
Dr. Sangeeta Wats

Submitted by:
Group – 3

Name Roll Number

Kalpesh Sontakke E008
Nitin Jaitly E029
Kislay Sinha G046
Riya Dholani H022

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DHFL

Dewan Housing Finance Corp Ltd was a financial services company based in India. The
organisation ran a nationwide network, serving a wide range of financial demands for its
consumers. Home loans, home extension loans, home repair loans, project loans, mortgage loans
(loans against property), small and midsize firm loans, and other home-related loans were
available from the organisation. Deposit products, life insurance services, general insurance
services, and asset management services were among the company's other goods and services.
Interest on housing and property loans accounted for the majority of the company's total revenue.

Another large NBFC, IL&FS, went bankrupt in 2018, raising alarms across the sector. When it
came to providing money to NBFCs, banks became considerably more cautious. However,
because credit was limited, this resulted in a liquidity shortage. When there is a liquidity
shortage, many NBFCs rely on short-term borrowing to fund long-term loans, which puts them
in a tough position. Following the IL&FS crisis in September 2018, DHFL's shares took a
beating, falling by as much as 60%. Cobrapost then stated in January that the company's
proprietors were involved in a Rs 31,000 crore money-laundering scheme. These assertions were
refuted by the corporation, which later stated that an independent chartered accountant's
investigation determined them to be false. Nonetheless, a variety of reasons conspired to put
DHFL in a tough position, requiring the company to sell a number of its assets in order to repay
its debt. Regardless, the firm failed to pay over Rs 900 crore in interest on June 4, forcing ratings
agencies to downgrade all of the company's commercial paper.

This was followed by DHFL filing for bankruptcy, and ultimately being acquired by the Piramal
Group.

Piramal Group

Piramal Enterprises Ltd is a holdings company with two business segments: financial services
and pharmaceuticals. Its financial services division specialises in lending to real estate
developers. This category also includes alternative asset management and retail lending
activities. Contract Development and Manufacturing, which provides solutions across the drug
lifecycle; Complex Hospital Generics, which provides anaesthetic and antibiotic drugs; and
Consumer Healthcare, which provides self-care goods, are the three divisions of Pharma. The
pharmaceuticals business focuses on the production, research, and distribution of medications for
hospitals across the world.

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One September 30, 2021 Piramal Capital & Housing Finance Limited of the Piramal group
completed its acquisition of DHFL. Banks will get a combination of cash and NCDs in the
DHFL insolvency resolution case, which is the largest recovery of stressed assets. This is the
first successful IBC resolution in the financial services industry, and it is also one of the largest
in terms of dollar value.

The recovery will aid banks in improving their bottom-line.

Motives of the merger/acquisition

This deal moved Piramal closer to the goal of becoming a major digitally oriented, diversified
financial services conglomerate focused on meeting the financial requirements of the country's
unserved and underserved clients.

This deal would build one of India's premier home finance companies, focusing on low-cost
housing. The new merged business is well positioned to lead India's digital-first retail
lending sector.

Piramal will be able to increase its retail book by almost 5 times and diversify its entire loan
book as a result of the DHFL purchase, attaining the required retail wholesale mix of nearly
50:50.

Also this acquisition is supposed to result in an approximately 130 basis point decrease in
weighted average borrowing cost and further strengthen the financial services business as
claimed by the Asset Liability Management (ALM) profile of Piramal Enterprises.

This deal will also reduce debt-to-equity ratio creating a headroom for significant growth in the
merged entity with the help of INR 18,000 Crores of equity being raised thus strengthening the
balance sheet to take advantage of such large opportunities

As a result of this acquisition, Piramal Enterprises is now aiming to offer used vehicle and two-
wheeler loans, as well as education loans for vocational and online courses, small builder credit
to satisfy construction finance needs, unsecured company loans, personal loans, and secured
loans

The primary motives for the merger may be described as follows:

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1. Diversification: This acquisition will expand the range of customers that Piramal will be
catering to and will lend the company a good opportunity to become a well-diversified
lender with an emphasis on becoming a retail lender.

2. Expansion: This deal will result in a significant rise in loan book size hence creating an
opportunity for the merged entity to become one of the largest HFCs in the country
focussed on affordable financing.

3. Scale: Also, this deal will build a pan-India distribution network with a 1 million-strong
consumer base present in 24 states with a network of 301 branches and 2,338 employees.

4. Customer Segment: Many people in this country lack the financial capacity to get credit,
and this will fulfil the neglected 'Bharat' market's financing demands in a low-cost sector.

5. Strengths the balance sheet: This deal will also lead to reduction in weighted average
borrowing cost by nearly ~130 basis points and should further improve the Asset
Liability Management (ALM) profile of the Financial Services business.

6. Capital Efficiency: This deal will also improve equity usage in the Financial Services
vertical of the conglomerate.

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Financial Statement Analysis

Key Ratios FY17 FY18 FY19 FY20 FY21

Profitability
Ratios
Gross Profit
Margin 84% 86% 88% 88% 85%
EBITA Margin 43% 50% 59% 50% 59%
Net Profit Margin 14% 47% 12% 0% 10%
Liquidly Ratios
Current Ratio 0.47 0.54 0.39 0.68 1.49
Quick Ratio 0.43 0.51 0.37 0.64 1.39
Turnover Ratios
Inventory
Turnover 1.94 1.96 1.82 1.58 1.48
Asset Turnover
Ratio 0.176 0.146 0.139 0.174 0.166
Leverage Ratios
Debt/Equity 1.786 1.470 1.786 0.973 0.968
Working Capital
Days
Inventory Days 188.4 186.1 200.9 231.0 246.8
Payable Days 199.1 210.2 232.2 215.5 223.8
Receivable Days 46.3 45.4 42.0 35.7 42.8
Return Ratios
ROE 8.4% 19.4% 6.1% 0.1% 4.1%
ROCE 11% 10% 13% 13% 12%
Vertical Statement Analysis
COGS/ Revenue 16.0% 13.9% 12.4% 12.4% 14.6%
Employee
Expense/ Sales 20.5% 18.3% 12.4% 11.9% 12.5%
Finance Costs/
Sales 23.2% 27.3% 33.6% 39.2% 31.9%
Depreciation and
Amortisation/
Sales 4.4% 4.4% 3.3% 3.8% 4.3%

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 Other Expenses 20.7% 18.0% 16.4% 25.9% 13.5%

Key Ratios FY17 FY18 FY19 FY20 FY21

Profitaility Ratios
EBITA Margin 85% 87% 65% -128% -225%
Net Profit Margin 29% 11% -8% -140% -171%
Liquity Ratios
Current Ratio 1.31 20.22 2.32 2.02 0.65
Turnover Ratios
Asset Turnover Ratio 0.146 0.139 0.174 0.166 0.180
Leverage Ratios
Debt/Equity 9.219 10.222 11.843 -16.302 -4.352
Return Ratios
ROE 36.2% 13.8% -12.4% -242.1% -72.9%
ROCE 13% 9% 14% -27% -96%
Veritcal Statement
Analysis
Employe Expense/
Sales 4.1% 3.4% 3.8% 3.0% 2.4%
Finance Costs/ Sales 69.4% 71.1% 72.9% 59.9% 2.5%

Depriciation and
Ammortisation/ Sales 0.5% 0.3% 0.4% 0.8% 0.9%

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 Other Expenses 9.0% 3.8% 23.6% 159.7% 297.2%
Piling losses have hampered the return ratios and profitability of DHFL

Process of the merger

Piramal's resolution plan was approved by 94 percent of DHFL creditors in January 2021. The
RBI, CCI, and NCLT all gave their approvals for the deal to go through. Piramal Capital and
Housing Finance Ltd. (PCHFL) will combine with DHFL as part of the process. Piramal
Enterprises Limited will hold 100% of the combined company. The DHFL creditors (including
FD holders) collected a total of Rs.38,000 crores as a result of the settlement procedure. This
sum is made up of I Rs. 34,250 crores to be paid by PCHFL in a combination of cash and Non-
Convertible Debentures, and (ii) Rs. 3,800 crores, which is the creditors' entitlement (as per the
resolution plan) from the cash balance held by DHFL.

DHFL had 70,000 creditors, and the majority of them received roughly 46% of their outstanding
debts when the resolution procedure was completed successfully. At the completion of the
transaction, the Piramal Group paid a total payment of INR 34,250 crores, which comprised an
upfront cash component of INR 14,700 crores and the issue of loan instruments of INR 19,550
crores (10-year NCDs at 6.75 percent p.a. on a half-yearly basis). There were ~70,000 creditors
of DHFL and most of them are recovering nearly 46% of their pending dues through the
successful completion of the resolution process.

Due Diligence

According to Jairam Sridharan, chief executive of Piramal Retail Finance, the bidding was
competitive, and the group employed artificial intelligence and machine learning throughout the
due diligence process to estimate how the DHFL book would perform and whether there was any
underlying fraud. The company took the complete database and created a machine learning
model on top of it that forecasted the risk of default for each client individually, also met 1,400
consumers who had been hand-picked, and double-checked that they were authentic.

The survey was robust and as far as other aspects of due diligence were concerned such as Legal,
Tax and the following external advisors and experts were fired for the said purpose.

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 Domain External advisors

Financial & Tax Due Diligence KPMG India Private Limited

Legal Due Diligence Trilegal

Documents / customer verification Third Party Agencies

Credit loss assessment CRISIL , CIBIL and Arpwood

Valuation CRISIL and Arpwood

Transaction & tax structuring KPMG India Private Limited3 and Trilegal

Resolution Plan Trilegal

Also, due diligence of various risks was also undertaken so as to mitigate any risks arising from
the deal.

Key risks Checked for Approach to size up the

banks

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 Credit risk Potential credit losses Independent models to
estimate losses

Charge creation Multiple loans from different Generated asset reference

institutions on same property number for all live accounts

Borrowers profile Customer footprint / Bureau checks of exposures

creditworthiness outside DHFL

Fraud risk Fake accounts / customer Physical visits and

existence verification of 1,416
customers

Property title deeds Loan / mortgage documents Reviewed 1,206 files to

establish title documents

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Synergies

1. Distribution channel synergies

2. Increase in consumer base

3. Presence of Piramal increased in States and UTs

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 4. Presence of Piramal increased in number of Towns and Cities

SWAP RATIO
Based on Market Prices
Target Acquirer
DHFL Piramal
Current Market Price 16.7 2474
No. of Shares (Cr) 31.00 23.86
Control Premium Assumed 0.25
Market Cap (Cr) 524.00 58985.00
Swap Ratio 0.0084

Based on Our Valuation

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 Target Acquirer
DHFL Piramal
Target Price 13.35 2790.72
No. of Shares (Cr) 31.00 23.86
Control Premium
Assumed 0.25
Market Cap (Cr) 414.00 66586.65
Swap Ratio 0.0048

Synergy Valuation
Revenue Synergy
Operating Revenue Synergy

Combined Operating Revenue 23,350.29

% synergy expected as per
past precedents (Assuming it
will continue) 2.0%
Operating Revenue Synergy
added 467.01

Total Synergised Revenue 23,817.30

Cost Synergy
Without With Total Synergy
Particulars DHFL Piramal Synergy Synergy Value
Operating Expenses 9133.67 10827.56 19961.24 18963.18 998.06
% of operating cost
synergy
(Assuming 5% cost
savings after due
diligence) 5.00%
Cost of borrowing 131.00 57.06 188.06 114.12 73.94
Total Cost Synergy 9264.67 10884.63 20149.30 19077.30 1072.00
Total Synergy Value Realized = 1539.01 Cr

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DHFL’s journey to acquisition

The case against DHFL

The founders of DHFL, the Wadhawans, were found to have syphoned money Rs 31,000 crore to
different promoter entities through multiple shell firms in January 2019, according to
investigative news site Cobrapost.

The company initially denied this, but additional investigations revealed that the Wadhawans not
only stole money from the home financing company, but they also ran the scheme for years right
under the noses of regulators and auditors.

The firm owes close to Rs 90,000 crore to multiple lenders, fixed deposit holders, and provident
fund holders in Uttar Pradesh when it was brought to bankruptcy court in December 2019.
Around 45,000 workers of the UP Power Corporation (UPPCL) took to the streets to protest the
parking of their PF corpus in DHFL, which is valued at around Rs 4,100 crore. The UP
government then requested that the Central Bureau of Investigation investigate DHFL and
UPPCL's investment.

The failure of DHFL highlighted not only the shortcomings in Indian auditing firms, but also the
weaknesses in rating firms that awarded it the highest grade. The proprietors of DHFL syphoned
off Rs 20,000 crore from DHFL to numerous organisations with no accurate records available on
the final use of money, according to KPMG's interim report from November 2019. DHFL was
then taken to the National Company Law Tribunal (NCLT) for debt settlement after the Reserve
Bank of India (RBI) issued a directive.

The Enforcement Directorate (ED) detained DHFL promoters Kapil and Dheeraj Wadhawan in
May 2020 as part of a money laundering investigation involving YES Bank co-founder Rana
Kapoor and others. They were already in custody, having been apprehended by the CBI, which is
also looking into money laundering allegations.

The Wadhawan brothers, who were also being investigated by the ED in a separate money
laundering case involving late mobster Iqbal Mirchi, were called by the agency many times in
the YES Bank investigation. They are also being investigated in connection with the Mirchi case.

The insolvency proceedings

The Reserve Bank of India (RBI) filed a case for bankruptcy against DHFL, a non-banking
financial company (NBFC), on November 29, 2020.

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DHFL is the first NBFC to file for insolvency, which was prompted by allegations of abuse of
finances within the business.
Most NBFCs do not have any physical assets, and the CIRP is being implemented as part of the
government's new resolution structure.
Because the RBI regulates all financial institutions in India, it was also the petitioner in a case
brought before the Mumbai bench of the National Company Law Tribunal (NCLT) to initiate
bankruptcy proceedings against DHFL.

The bidding process

The lenders received 24 expressions of interest (EoIs) for DHFL's loan portfolios after seeking
offers for the firms in February 2020. KKR, Bain Capital, Arcil, and Oaktree were among the
bids for all three portfolios on offer. Other corporations competed just for the retail and slum
rehabilitation loan portfolios. However, by the time financial offers were sought, just four people
remained in the race, as others were scared off by the massive flaws in the company's accounts.
The Piramal group, the Adani group, the US-based vulture fund Oaktree, and SC Lowy were the
final bidders.

In the initial round of bidding, Oaktree offered Rs 20,000 crore for the entire firm (including Rs
8,000 crore in delayed payments with interest), whereas Piramal only bid Rs 15,000 crore for the
retail book. Only the construction financing and slum rehabilitation books were of interest to the
Adani company, which offered roughly Rs 3,000 crore. SC Lowy stated that it was solely
interested in the construction financing book. Because the lenders were dissatisfied with the
offers, they requested a new round of bids. The Adani group stunned everyone when it made an
all-cash offer for the firm, outbidding both Oaktree and Piramal. The three other bidders then
filed a complaint with the Committee of Creditors against Adani (CoC). The Adani group
claimed in a letter dated November 22 that its original expression of interest was solely for
DHFL's wholesale and slum rehabilitation businesses, and that they hoped to close the deal with
Piramal, which had bid just for the retail assets.

However, after all of the proposals were opened on November 9, the group realised that its
competitors' offers did not accurately reflect the company's value. As a result, it made an offer
for the whole firm, which drew in competing bids. According to the organisation, some bidders
organised a "cartel" with the goal of preventing a thorough and fair auction process. The CoC
decided to hold another round of bidding after seeking legal guidance. When the third round of
bidding began, Oaktree's offer was the highest, but it came with a number of conditions. Adani
was placed third in the contest, while Piramal was ranked first and proposed to merge its finance

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company with DHFL. "However, the Adanis' offer resulted in banks realising at least Rs 4,500
crore more," a banker said.

Piramal against Oaktree

Oaktree and Piramal began informing lenders that their competitor's offerings were legally faulty
and may be contested in court.
However, Oaktree's bid was doomed since it would not be approved by the insurance regulation
to hold an interest in an insurance venture because doing so would violate the foreign direct
investment (FDI) ceiling — a foreign partner, Pramerica, already has a 51 percent stake. Enam
also pulled out of Oaktree's proposed AIF (alternative investment fund) structure after the
proposal was submitted, alarming lenders.
At the same time, because the additional Rs 1,700 crore offer arrived after the December bid
filing deadline, the CoC did not take it into account while rating the proposals, instead noting it
as a footnote in the scorecard.
Enraged, Oaktree wrote to the CoC on January 6 to explain how their offer was superior than
Piramal's and that it could be implemented lawfully. Apart from issuing a non-existent rating on
future bonds to be sold to lenders, Oaktree's scheme will fail the capital adequacy test, according
to Piramal. Worried that Oaktree's offer would be impossible to implement, the lenders
ultimately chose the Piramal, putting the process to a close.

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Post-merger Transformation Timeline

Current Phase

Happenings after the Merger deal between Piramal Enterprises and DHFL

Piramal Enterprises Limited’s subsidiary Piramal Capital & Housing Finance Limited (PCHFL)
completed its merger with the debt-ridden Dewan Housing Finance Limited (DHFL) with effect
from September 30, 2021. This deal is an example of a reverse merger deal, as was contemplated
under scheme of arrangement provided under the resolution plan. This merger was completed
with an announcement of paying Rs 34,250 Crore to the creditors of the troubled DHFL.
In view of the reverse merger arrangement, DHFL would issue shares to the shareholders of
PCHFL (or to Piramal Enterprises Limited) in accordance with the scheme under the resolution
plan. Upon allocation of the shares, DHFL would become a wholly-owned subsidiary of Piramal
Enterprises Limited (PEL).
The deal has provided PEL a chance to go ahead with its strategic roadmap comprising
transforming and expanding the PEL’s financial services business. The deal also provides an
inorganic growth opportunity to PEL and a chance to leverage operating synergies.
After the acquisition, the Piramal group wants to make its financial services diversified with a
wide choice of retail lending.
Just after the acquisition was completed, investors showed a positive sentiment and showed a
huge interest in the Piramal Enterprises stocks on the exchanges. This positive reaction was
based on the belief that there would be two separate companies focusing on two different
businesses (healthcare and housing finance segments).

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The synergies that are likely to be obtained through the merger include the following:
1. Piramal Group will have an access to over 1 million lifetime customers.
2. Piramal Group will have presence of its financing arm across 24 states with a huge
network of 301 branches and over 2000 employees. The group is very much optimistic on
the success of the merger deal as it plans to add another 1000 employees in near term and
take a branch network to 1000 in five years.
3. The deal has a potential to scale up the Piramal’s retail loan book to 5 times. The merged
entity is expected to have a loan portfolio worth Rs 65,000 Crore. This aim has been in
line with a strategic roadmap to transform Piramal’s financial services business arm over
the last two years.
4. The company has been able to raise Rs 18,000 Crore of Equity and has strengthened the
balance sheet in order to plan further and take advantages of such large opportunities.
5. The merged entity has a significantly decreased debt to equity ratio and thus it has a
potential to create significant growth in the future.
6. The deal is likely to reduce the weighted average cost of capital by nearly 130 basis
points and thus has a potential to improve the asset liability management profile of the
financial services business of the Piramal group.

Impact of the deal on Piramal:

On 29th September, 2021, Piramal Enterprises Limited announced that it had completed the
acquisition of DHFL. The stock market reacted to this news and Piramal Enterprises Limited
(PEL) closed on NSE at Rs. 2642 on 29th September, with previous day closing being at Rs
2683. It continued its downward journey the next day as well, when it closed at Rs 2595 on 30th
September. However, taking into consideration the strategic motives of the acquisition, the stock
market soon reacted positively. The result was that the PEL stock ended at Rs 2922 on 4th
October, 2021, a rise of more than 12% from the dip on 30th September.

Impact of the deal on DHFL:

DHFL was delisted from BSE as well as NSE on 14th June 2021. The two bourses had suspended
the trading on the DHFL stocks as per the orders from National Company Law Tribunal (NCLT)
in view of its resolution plans. It was done as a result of a proposal submitted by the Piramal
Group in January 2021. However, the provisions in the resolution plan included the delisting of
the DHFL shares, which was finally done on 14th June 2021.

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Post-merger Integration process:
Piramal Enterprises Limited, after getting its merger done with the DHFL group, announced
demerger of its pharma business. They also suggesting simplifying their corporate structure. The
board of Piramal Enterprises has gone ahead with an approval of a scheme of arrangement with
an objective of transforming the group from a “multi-sector conglomerate” into “two separate
sector-focused listed entities” in financial services business and pharma business respectively.
The demerger is likely to:
1. strengthen the governance architecture for the two businesses with separate and dedicated
Boards and management teams;
2. create an optimal capital structure for each of the two business divisions;
3. empower both the business entities to independently pursue their growth strategies, both
organically as well as inorganically;
4. trigger value-unlocking for Piramal Enterprises’ shareholders.

The demerger is subject to shareholders’, creditors’ and regulatory approvals, it is expected that
the process would take another year. Piramal Enterprises would be looking forward to effectively
leveraging the acquired DHFL network to cross-sell existing retail products.
The major strategic plan of the PEL group is to demerge the pharma business and list it
separately. As per the plan, the pharma business would get vertically demerged from the parent
PEL and would be consolidated under Piramal Pharma (PPL). Post the planned demerger, PPL
would be listed on the BSE and the NSE. Further, two operating subsidiaries which are wholly-
owned by PPL, namely Hemmo Pharma Private Limited which is focused on development of
peptide APIs and manufacturing capabilities and Convergence Chemical Private Limited which
has a focus on development, manufacture and sales of specialty fluorochemicals would also be
amalgamated with PPL to further simplify the pharma corporate structure.
Regarding the financial services structure, NBFC at holdco level with 100% HFC subsidiary
PHL Finvest Private Limited, 100% owned NBFC subsidiary of PEL, would get amalgamated
with the parent PEL to create a listed NBFC. This implies that the merged housing finance
company, post the DHFL acquisition, would remain a wholly-owned subsidiary of PEL.
Regarding the shareholding pattern, it has been decided that the shareholders of PEL will get 4
equity shares of PPL for every one equity share in PEL, in addition to their existing shareholding
in the parent company PEL. However, both the companies will be separately listed on the NSE
and the BSE. The shareholders of PEL would be directly owning shares in both the listed
entities, without any cross-holdings and minority stakes.

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References

https://www.business-standard.com/article/companies/piramal-capital-housing-finance-acquires-
dhfl-via-reverse-merger-121100100379_1.html
https://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/after-
acquisition-of-dhfl-piramal-group-sets-eyes-on-demerger-of-pharma-
business/articleshow/86619225.cms?from=mdr
https://www.thehindu.com/business/Industry/piramal-group-acquires-dhfl-pays-14700-crore-in-
cash/article36730639.ece
https://www.timesnownews.com/business-economy/companies/article/piramal-group-completes-
acquisition-of-stressed-dhfl-to-focus-on-retail-affordable-housing-loans/818428
https://www.livemint.com/news/india/investors-to-move-sc-against-plan-to-delist-dhfl-shares-
11623955779992.html
https://www.financialexpress.com/market/piramal-enterprises-maintain-hold-with-a-revised-
sotp-based-target-price-of-rs-2933/2348151/
https://www.piramal.com/wp-content/uploads/2021/09/Press-Release_Piramal-DHFL-
Acquistion_Sept-29-.pdf
https://www.dhfl.com/docs/default-source/investors/annual-reports/2018-2019/dhfl-annual-
report-fy-2018-19.pdf?sfvrsn=23c4a827_0
https://www.dhfl.com/docs/default-source/investors/annual-reports/2018-2019/dhfl-annual-
report-fy-2018-19.pdf?sfvrsn=23c4a827_0
https://www.bseindia.com/stock-share-price/piramal-enterprises-ltd/pel/500302/

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