INSUBCONTINENT EXCLUSIVE:
Shares of Bandhan Bank and Gruh Finance slipped up to 12 per cent early on Tuesday after former agreed to acquire housing finance firm
through a share swap deal
Under merger agreement, shareholders of Gruh Finance will receive 568 shares of Bandhan Bank for every 1,000 shares held.
Gruh Finance is
promoted by India's largest mortgage lender HDFC
The amalgamation will result in enhancement of shareholder value accruing from synergy of operations, new products development, integration
of technology and information, both companies said in regulatory filings to stock exchanges.
Gruh Finance was trading 12.13 per cent down at
rating on Bandhan Bank with a price target of Rs 540
Shareholders will be paying 13 times for Gruh as against 4.5 times paid for Bandhan.
The merger will reduce promoter stake in Bandhan Bank
to 61 per cent, from 82.3 per cent
HDFC Ltd will end up holding 14.96 per cent stake in merged entity
According to Phillip Capital, merger ratio is EPS and book value dilutive for Bandhan Bank by 6.5 per cent and 12 per cent, respectively
At current market price, swap ratio is negative for Gruh Finance and is expected to witness around 7 per cent correction
The deal values Gruh Finance at 12.5x trailing price to book value
Bandhan Bank being a microfinance entity enjoys high spread and return on asset (RoA) of 4.25 per cent (trailing) compared to 2.6 per cent
Gruh Finance has developed a very profitable and niche business franchisee over years
So, acquisition of Gruh Finance by Bandhan Bank is pricey
Moreover, geographically, it seems like east meeting west, according to Phillip Capital.
Bandhan is dominant in eastern India with 51 per
cent of its distribution network in eastern India and only 8.5 per cent in western India
On contrary, Gruh Finance has a dominant presence in western India.
The acquisition is expensive for Bandhan Bank and does not fully resolve
promoter stake dilution concern, according to market experts.
