27th March 2012

The dark horse wins the race

The proverbial dark horse won the race finally ! Even as names of the top 5 AMCs in India were being repeatedly bandied around in media as the ones in the final lap in the race to acquire Fidelity's India MF business, the winner turned out to be one of the least expected names - L&T Finance.

L&T Finance Limited(LTF), a subsidiary of L&T Finance Holdings Limited (LTFH), has announced today that it has executed definitive agreements to acquire FIL Fund Management Private Limited (Fidelity AMC) & FIL Trustee Company Private Limited, the companies carrying on the mutual fund business of Fidelity in India, subject to regulatory approvals.

Contours of the deal

Here are the contours of the deal as we understand it :

• Subject to regulatory approvals, the businesses of L&T MF and Fidelity MF will be merged, creating a business with over Rs. 13,000 crores of assets, roughly evenly divided between equity and debt funds

• The entire business team of Fidelity India will be absorbed. Over 100 members of Fidelity's business team (all departments except equity fund management) will join the 200 + team of L&T MF

• Fidelity's equity fund managers will continue to manage the funds until completion of regulatory formalities and will even after that, continue to support L&T MF's fund management team for a further period of time, to ensure continuity of processes that Fidelity's investors and distributors have come to value over the years

• Fidelity's fixed income team will join the merged entity

• Business continuity has been assured in this transaction, as the entire business team is being absorbed. To a great extent, continuity of fund management processes on the equity side is also being addressed, with an elaborate hand-holding process being put in place during an extended transition period

• It appears that even though L&T Finance may not have been the highest bidder (it bid around Rs. 500 crores), Fidelity decided in favour of L&T Finance, in good part because of an agreement over a smooth business transition and fund management processes transition - which it believes is in the best interests of its investors and distributors.

One step closer to market leadership

On this occasion, Mr. Y. M. Deosthalee, CMD of L&T Finance Holdings Limited, said, "With this acquisition we are one step closer to achieving our vision of being among the top players in the Indian mutual fund industry. We remain committed to that goal and look forward to building one of India's most admired asset management businesses. This acquisition provides L&T Mutual Fund the necessary scale, products and access to retail customers to grow profitably."

''We see tremendous complementary strengths between both the mutual funds. The strong equity-focus of Fidelity's Indian Mutual Fund, when combined with L&T Mutual Fund, results in a balanced asset base. The size of the combined entity (average AUMof ~ INR13,497 crores for the quarter ended December 2011, with a market share of ~ 2.0%) together with the backing of the ''L&T'' brand would provide an optimal platform to improve margins and grow profitably. Together, the complementary skillsets, distribution reach and client base present a well balanced overall picture", said Mr.N.Sivaraman, President & Whole-time Director, L&T Finance Holdings Limited.

Shared values were the foundation of this deal

Commenting on the transaction, Ashu Suyash, MD, Fidelity India said, "The foundation that underpins this transaction is the shared values of L&T Finance and Fidelity and the high standards of business ethics that both Groups value and cherish. The business models of L&T Mutual Fund and Fidelity Mutual Fund are complementary, thus creating strong synergies. I am happy that business continuity has been addressed with the team moving along with the assets - this will help us continue serving our investors and our distributors with the same levels of commitment as they enjoyed over the past 8 years."

Who gets the top job?

The organisation structure of L&T Mutual Fund will now need to be re-worked to accommodate senior management teams of both entities in suitable roles. Early indications suggest that Ashu Suyash may head the combined entity - however, one will have to wait for confirmations on this one as these are matters that will take some time to crystallise. Integration of the sales teams may not pose too much of a challenge as L&T MF has over 50 branches and will need quality talent to help it realise its growth ambitions. The fact that Fidelity's sales team is seen as strong in the banking channel and the L&T team's strengths are perceived more in the IFA channel, should help integrate both the sales teams relatively smoothly.

What does this mean for investors and distributors?

So, what does this deal mean to investors and distributors? L&T is a great domestic brand and L&T Finance has embarked on a major drive for market leadership in financial services. One can argue that a strong brand and commitment towards the business should provide comfort to investors. For distributors too, this transaction sends out a very strong signal of L&T MF's intentions to achieve leadership in the MF business, despite the challenging environment and not-so-encouraging near term industry outlook. The added bonus here is that there will be no dislocation to investors/intermediaries on account of same RTA and continuity of investor and intermediary facing processes. As we all know investors and intermediaries feel the pain whenever there is a transition but are hardly in a position to do anything about it. This time it will be different.

For advisors, the critical issue is how Fidelity's equity fund range will be managed under the stewardship of L&T MF's equity team. As we understand, this is an issue that has been discussed at length between both companies. A fairly elaborate knowledge transfer process is planned to take place in terms of L&T MF's equity team imbibing best practices in terms of processes from Fidelity's team. The fact that Fidelity's Indian fund managers will be available as resources to L&T MF's team for a while beyond the time it takes to get regulatory approvals, should give comfort to all stakeholders that an adequate hand holding will be available to ensure continuity of processes.