DHFL bidding war: Top reasons why Piramal Group holds the upper hand against Oaktree Capital

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The resolution of the DHFL insolvency is nearing completion, and quite expectedly, the market is waiting with bated breath to see how the bidding war for the company will play out. The Committee of Creditors (COC) has had over two weeks to go over the many bids that were put forth before it, and this Thursday, as things are set to come to a close, it remains to be seen which bidder succeeds in winning over the CoC. 

In the meantime, after carefully weighing the bids presented to the CoC, we believe there are two contenders that stand out – Indian conglomerate Piramal Group and American AMC firm Oaktree Capital. Of these, Piramal Group holds the upper hand and would likely be the more prudent choice. 

Here are a few prominent reasons why.

• The Piramal bid offers highest upfront cash and qualitatively, the best bid: Piramal’s plan includes the highest upfront cash. In comparison with other bids, this option allows creditors higher liquidity. Also, as far as the CoC-mandated scorecard for evaluation is concerned, the Piramal bid stands head and shoulders over the other bids. This makes it the top contender qualitatively as well as quantitatively.
• Piramal has followed the due process diligently:The bidding process is dotted with many regulatory requirements. And from what we’ve studied, it’s apparent that Piramal has followed all the process guidelines diligently so far, without violating any of the many norms laid out by the COC. For instance, all the final bids have been submitted within the prescribed bid limits. By contrast, as media reports suggest, Oaktree allegedly sent out a letter two days after the formal closure of bidding, adding to their bid amount. This is clearly a move that violates the due process laid down, and down the line, this would be open to legal questioning.
• Piramal is better placed to acquire the insurance business:In insurance business regard, Piramal has an edge over Oaktree, since the Indian conglomerate has put out a bid with a straight offer of Rs. 1,000 crore for the insurance business. On the other hand, the Oaktree offer is payable at the level of a subsidiary (DIL), and so, it offers no clear path to extract that amount and apply it for the benefit of the DHFL lenders.
• The Oaktree bid is riddled with multiple regulatory issues: On the one hand, the CoC  is obligated to choose the offer that is most beneficial to them. But that’s not the sole criteria they need to ponder upon. It’s also important that the CoC enlists the bidder who is not likely to languish in litigation in the coming years. On that front, Oaktree fares poorer than Piramal, because the American asset buyer has multiple regulatory issues that are likely to attract legal challenges and regulatory hurdles in the near future.

Here’s a quick preview of two key issues.

• Regulations suggest that the insurance business cannot be owned by Oaktree, a foreign player, as it violates FDI norms of India. While Oaktree may have suggested that they could employ an alternative investment fund (AIF) as a potential solution, the truth remains that this has no precedent in India across any of the 24 life insurance companies. So, the IRDA is unlikely to approve the route that Oaktree is proposing. 
• Oaktree has also made claims about the ratings of their instruments. Now, this could be in violation of SEBI’s norms and if media reports are to be believed, SEBI is currently investigating the matter. If a violation is recorded, that would no doubt lead to legal or compliance-related repercussions for the bidder. 
• Piramal Group, on the other hand, has none of the potential legal hurdles. The bid they’ve put forth is clean and devoid of any possible legal entanglements.
• Piramal is infusing the most equity:A quick comparison of the equity infusion by the two strongest bidders also leans in favor of the Piramal Group. Take a look at the numbers here. 
• Piramal is infusing Rs. 3,800 crore of equity into DHFL, with another Rs. 16,000 crore available in the Financial Services business for the future. 
• Oaktree, meanwhile, is only infusing Rs. 1. lakh now, with a promise of Rs. 1,000 crore of either debt or equity in the future. 
• Piramal’s bid appears to be lucrative for retail FD holders as well: In addition to the details promised above, the Piramal bid has also offered Rs. 150 crore specifically for retail FD holders. This is to be offered over and above the regular allocation that might be done to them by the CoC. In this manner, Piramal Group’s bid also secures the interests of the retail investors.

The takeaway

Given the clearly superior components of Piramal’s bid, it’s evident that the Indian corporate giant has an edge over its foreign competitor. Ultimately, the CoC must look at three key aspects before picking a bid:

• A lucrative offer
• A regulatorily compliant bid
• Quick turnaround time for creditors 

Piramal Group’s bid scores well on all three fronts. The implementation of the Piramal plan is also expected to be much shorter, as insurance-related complications don’t exist in their bid. This reduces open ended commercial risk for lenders on interest income. 

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