Why the scrapping of PNB Housing Finance deal is a setback for Aditya Puri and Carlyle

Existing shareholders of the company, funds managed by Ares SSG and General Atlantic, were also supposed to participate in the capital raising. Puri was set to join the PNB HFL board after the investment.

The announcement meant that within a year of leaving the HDFC Bank family, with which he was associated for more than a quarter of a century, Puri would be competing with his former employer’s parent Housing Finance and Development Corporation (HDFC) in the pure-play housing finance business.

But things didn’t go as smoothly as planned.

The market regulator, on May 31, directed PNB HFL to halt the issue until the company undertakes a fresh valuation from an independent valuer. Later, the Securities Appellate Tribunal allowed PNB HFL to conduct an annual general meeting, but asked the company to not announce the results of the meeting until a final order.

PNB HFL challenged the order by the Securities and Exchange Board of India (SEBI) at SAT which passed a split verdict.

In the meantime, the housing financier’s promoter and biggest shareholder, Punjab National Bank, also wrote to PNB HFL to reconsider the structure of the deal against the backdrop of objections raised by SEBI. PNB later said it never objected to its housing finance arm’s deal with Carlyle, but only asked it to follow SEBI directions.

The deal had hit a dead-end by then.

On 14 October, the board of PNB HFL terminated the Rs 4,000-crore fund raising deal with the Carlyle-led group of investors, citing pending legal issues.

Subsequently, Pluto Investments, a Carlyle entity, will be initiating the process of withdrawing an open offer made by it, the finance company said in a notice to stock exchanges.

The Carlyle-PNB HFL deal is unlikely to take off again post the formal announcement. Puri too is unlikely to invest in the housing financier; his investment through Salisbury was part of the Carlyle-led consortium.

Jyoti Roy, deputy vice president at Angel Broking, said the markets would have been happier with a higher offer price.

“There were valuation concerns,” said Roy. “However, from an acquirer’s point of view, they would have taken a call considering the asset quality of the book as well,” said Roy.

The gross non-performing assets of PNB Housing Finance spiked to 6 percent of the gross advances by June 30, 2021, from 2.76 percent a year ago.

What does it mean for Carlyle and Puri?

For Carlyle, the failure of the deal means a big opportunity lost in the Indian market. The deal, if executed, would have seen US-based Carlyle Group taking control of the lender.

To be sure, PNB HFL wasn’t arguably the best pick for Carlyle and Puri. There are bigger and better performing entities in the space.

In terms of total assets under management (AUM), PNB Housing Finance is far behind market leader HDFC, which controls two-thirds of the housing finance market among non-banking financial companies and has a one-fifth share in the mortgage lending industry.

As of March 31, 2020, PNB HFL’s total AUM was Rs 74,469 crore, compared with Rs 5.70 lakh crore of HDFC. In fact, PNB HFL was in the fourth position, behind LIC Housing Finance Limited (over Rs 2.13 lakh crore AUM) and IndiaBulls (Rs 80,741 crore) in terms of total asset size.

But for Carlyle, PNB HFL was a familiar bet. The private equity firm has been an investor in the PNB-backed mortgage financier for six years. There are analysts who thought PNB HFL was a good bargain for any investor considering the backing of PNB and its growth potential. Perhaps that's the reason why Carlyle and Puri zeroed in on PNB HFL.

For Puri and Carlyle, the failure of the PNB Housing-Carlyle deal is therefore a setback. Besides the business synergies, the Puri factor was supposed to benefit Carlyle after the acquisition in a big way.

“Mr. Aditya Puri’s nomination to the Board will lend considerable credence to the company’s business transition and strategic intentions,” said ICICI Securities in a note on May 31.