Exit New York Life, enter Mitsui Sumitomo
Max India today entered into a tripartite agreement for its life insurance joint venture, Max New York Life. The agreement would pave the way for the exit of its existing foreign partner, New York Life (which holds a 26% stake) and the entry of Mitsui Sumitomo Insurance Company (Mitsui Sumitomo).
Structure of the deal
As per the terms of the deal, Mitsui Sumitomo would acquire a 16.63% stake from New York Life and a 9.37% stake from Max India for a total consideration of Rs2,730 crore. The deal will value the insurance business at Rs10,500 crore.
Max India would get Rs984 crore to sell the 9.37% stake but it would acquire the 9.37% stake left with New York Life for Rs182 crore. In the process, Max India's stake in the insurance business remains at 70% but it gains close to Rs802 crore in the bargain.
Upside to our SOTP valuation
The implied valuation of the insurance business at Rs10,500 crore is at a 31.5% premium to Rs7,975 crore as per our calculation. The premium works out to over 40% if we consider the Rs800 crore profit on the deal with Max India. This implies an upside of Rs60-80 per share to our price target.
In October last, the company had also sold 26% stake in its healthcare subsidiary to South African Life Healthcare. The implied valuation of the deal stood at a 25% premium to our SOTP based price target.
Taking the implied valuations of both the deals, there is a potential upside of 30-40% (Rs72-90) to our current price target of Rs234 per share. We are currently not revising our price target but will come out with a detailed note on the company after the conference call scheduled on Monday (April 16, 2012). We remain extremely bullish on Max India and retain our Buy recommendation on the stock.
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