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 Rs 266.35 at around 9.30 am while BSE Sensex was 0.08 per cent lower at 35,822.18.Global brokerage firm Macquarie maintained Neutral rating on Bandhan Bank with a price target of Rs 540.
It termed acquisition of Gruh Finance from minority shareholders point of view as "a wrong decision".
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.
Post merger, share of micro banking asset would come down to 57 per cent from 86 per cent for Bandhan Bank.
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 for Gruh.
Post-merger, RoA of merged entity is expected to compress, it stated.
Gruh Finance has developed a very profitable and niche business franchisee over years.
So, acquisition of Gruh Finance by Bandhan Bank is pricey.
Both entities cater to bottom of pyramid segment and hence acquisition can be termed as complementary from Bandhans standpoint.
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.