PFC–REC Merger Gets Board Nod in Principle: UBS Expects Re-Rating, 42% Government Stake in Merged Entity

The board of Power Finance Corporation (PFC) on Friday granted in-principle approval for the merger of its subsidiary Rural Electrification Corporation (REC) with itself, marking a major step towards consolidation in the public sector non-banking finance space. Following the merger, PFC will continue to retain its status as a "government company" under the Companies Act, 2013, and other applicable laws.

PFC-REC Merger: Board Approves Plan in Principle, Govt Company Status to Remain

The board's decision comes days after the proposed restructuring of PFC and REC was announced by Finance Minister Nirmala Sitharaman in the Union Budget. The government has outlined consolidation of public sector NBFCs as part of its broader vision to build scale, improve efficiency and enhance credit delivery in line with the goals of Viksit Bharat.

PFC had earlier acquired a controlling stake in REC in March 2019 after receiving in-principle approval from the Cabinet Committee on Economic Affairs (CCEA). The acquisition involved the purchase of 52.63 percent of the government's stake in REC for Rs 14,500 crore, following which REC began operating as a subsidiary of the state-owned power sector lender.

In a regulatory filing, PFC said its board took note of the Budget announcement and approved the merger proposal in principle. The company added that all steps would be taken to ensure that PFC continues to qualify as a government company even after the restructuring.

PFC-REC Merger Update: UBS Sees Re-Rating, 34% Share Dilution for PFC

Global brokerage UBS has said both PFC and REC have confirmed that the merger process will begin following the Budget announcement. In its note dated February 9, UBS highlighted that PFC, which currently owns 52.6 percent of REC, is itself 56 per cent owned by the central government. Under the proposed structure, REC is expected to be merged into PFC, with PFC issuing new shares to REC shareholders.

The merger will be carried out under the Companies Act, with an independent valuation determining the share swap ratio. Based on current market prices, UBS estimates that REC shareholders may receive eight PFC shares for every nine REC shares held. At current prices, UBS expects PFC's share count to increase by about 34 per cent following the merger.

Without factoring in any merger-related synergies, UBS estimates PFC's book value per share (BVPS) at Rs 474 in FY27. It also projects that the government's stake in the merged entity could decline to around 42 per cent from the current 56 per cent holding in PFC.

According to UBS, the merger could improve pricing power for the combined entity due to a large overlap in customer base, lead to higher growth and eliminate the holding company discount that exists in the current structure. The brokerage believes this could result in a re-rating of the stock, with the merged entity currently valued at around 0.88 times FY27 price-to-book.

For REC shareholders, UBS said the swap ratio will be the key near-term catalyst. "We remain constructive and await more clarity on the merger," the brokerage noted.

UBS also pointed out that continued government support will remain critical post-merger, as both PFC and REC rely on implicit sovereign backing to secure lower funding costs. The brokerage flagged the single borrower exposure limit as a potential challenge, noting that this issue had earlier contributed to the shelving of a similar merger proposal.

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