Magma’s struggle over asset quality and liability franchise had been well known and after attempting to revamp the business model for a couple of times in past few years, Magma Fincorp has finally signed a deal with Rising Sun Holdings, controlled by Adar Poonawalla, for a preferential issue of equity shares.
Post the ILFS crisis, Magma Fincorp had been struggling to raise money from capital markets and their dependence on bank borrowings had been consistently increasing.
Moreover, the volatile trends in asset quality (especially in vehicle finance) had kept the profitability under consistent pressure. This transaction would strengthen Magma’s overall capital position and would allow the company to realign its business as desired, according to a research by Emkay Global Financial Services.
The transaction will result in Rising Sun Holdings acquiring a controlling stake in Magma. This will also trigger an open offer 26% of expanded equity as per the public announcement made under SAST guidelines. Magma has already announced an open offer at Rs70 per share (equivalent to preferential allotment price). Post preferential issue, Rising Sun Holdings would be classified as promoter and Magma would be rebranded as Poonawalla Finance.
The proposed allotment is at a discount to current book value, Emkay Global Financial Services said. As part of the transaction, Magma has proposed to allot 458mn shares to Rising Sun Holdings and 35.7 million shares to existing promoters. Thus, Magma will issue a total of 493.7mn shares for a consideration of Rs 34.6 billion, implying an average price of Rs70 per share — a 34% discount to December 2020 book value of Rs106. Magma’s total share capital as of December 2020 stood at Rs 28.6 billion, which would rise to Rs 63 billion (post allotment) — a proposed dilution of 65 per cent of enhanced capital.
Magma’s current shareholding pattern indicates a 24.4 per cent promoter stake and 75.6 per cent remains free float; however, post preferential allotment as per the revised structure, new promoters (Poonawalla Finance) would hold a 60 per cent stake and 13.3 per cent would be held by existing promoters and free float would reduce to 26.7 per cent. The filing also proposes that post preferential allotment, the existing businesses of Poonawalla Finance would be consolidated into Magma Fincorp, the report said.