What could be implications if Tata MF buys out UTI

Mutual fund consolidation has been happening for some time now. In recent deals, HSBC AMC has taken over L&T Mutual Fund and Bandhan Bank is all set to take over IDFC Mutual Fund. Sometime back, IDBI Mutual Fund merged into Sundaram Mutual Fund. These are just the recent mergers in the mutual funds space. Over the last 20 years or so, scores of mutual funds have merged or acquired other AMCs. For many of these players, an inorganic strategy is a quicker ticket to expanding AUM since organic growth takes a long time and it is never going to be easy competing with bancassurance players in the MF space.

In the latest found of reports, it is reported that UTI Asset Management Company (AMC) may sell out its mutual fund business to Tata AMC. Incidentally, Tata Mutual Fund started off with a lot of promise and flourish but could never really scale up its business the way other players have done. Now, in a swooping move, it is expected that Tata Mutual Fund will buy out the stakes held by PSU banks in UTI, which is likely to give them a majority stake in UTI AMC. However, for the time being, neither UTI nor Tata Mutual Fund have either confirmed or denied such news reports. Obviously, there is no smoke without fire.

While the details are yet to come out in a big way, it appears that the Tata group may be in final stages of talks to acquire the necessary stake. Clearly, under the leadership of N Chandrasekharan there is not room for being in any business if the company is not in the top-3. That is what this deal is likely to achieve. For instance, it is reported that Tata Mutual Fund will buy out the majority stake in UTI from 4 state owned entities. These include Punjab National Bank (PNB), Life Insurance Corporation of India (LIC), State Bank of India (SBI) and Bank of Baroda (BOB). Other than these 4 institutions, the only major shareholder in UTI is T Rowe Price, which is a strategic investor in UTI over the last few years.

However, this is not the first time that such news reports have flowed in. Even earlier this year in August 2022, there were a number of reports hinting that the Tatas could take over a controlling majority stake in UTI. If the deal does happen, it could really shake up the ranks among the top ranked AMCs. Currently, in terms of total assets under management (AUM), UTI ranks eight while Tata Mutual Fund ranks twelfth. However, if the two AUMs are combined under a single banner, then the combined entity gets immediately catapulted to the fourth rank in terms of AUM of asset management companies in India.

Currently, if you look at the AUMs of the two AMCs, UTI has a total AUM of Rs. 2.30 trillion while Tata Mutual Fund has AUM of Rs. 91,000 crore. The combined entity will have total AUM in excess of Rs. 3.2 trillion. That will make the combined entity the fourth largest fund in India after SBI MF, ICICI Prudential MF and HDFC MF. This literally catapults the combined entity into the big league. But, more importantly, this is acknowledgement of the fact that to survive and thrive in the mutual fund business in India, scale is the primary requirement. That is how marketing and administrative costs can be easily defrayed and spread out and in the process the overall total expense ratio is reduced. That surely benefits the investors.

But, how much will the deal cost Tata MF? Currently, UTI has a market cap of nearly Rs. 9,800 crore. The 4 PSUs financial institutions jointly hold 45.16% stake in UTI. Tata MF will have to shell out Rs. 4,425 crore for the stakes held by these four companies, but they are most likely to demand a control premium. In addition, after this stake is purchased, Tata MF will have to make an open offer for an additional 26% stake in UTI AMC, which would cost another Rs. 2,500 crore. Clearly, Tata MF would end up shelling somewhere close to Rs. 7,000 crore for taking control of UTI MF. Now it remains to be seen as to when and whether this happens.