Shares of IndusInd Bank and Bharat Financial Inclusion (BFIL) surged up to 5.5% on Monday as the two companies entered into an exclusivity agreement to evaluate merger. The stock of IndusInd Bank rose by 5.56% and ended the session at a record high of Rs 1,790.65. Bharat Financial Inclusion on the other hand rose by 3.34% and ended the session at Rs 967.25. Bharat Financial Inclusion’s stock has doubled from its December lows. The stock is trading at a price to book value (PBV) to 5.45, compared to Ujjivan Finance’s PBV of 2.54 and Equitas’s 2.61. Both the companies, in filings to exchanges, said they entered into an exclusivity agreement to evaluate a potential strategic combination between them. “The exclusivity agreement provides for a mutually agreed exclusivity period for due diligence and discussion to evaluate a potential strategic combination between the company and BFIL by way of amalgamation through a scheme of arrangement, or any other suitable structure,” IndusInd Bank said in a stock exchange notification.
The potential transaction would be subject to due diligence, agreement on the appropriate transaction structure, definitive documentation, and board, shareholders, regulatory, NCLT and other third-party approvals, as applicable.
At Monday’s price, the market capitalisation of the merged entity would be more than that of Axis Bank, making it the fourth largest private sector lender in terms of market value. In a note investors on the deal, analysts at Edelweiss said, for IndusInd Bank, this potential merger would be synergistic, boost earnings, RoA’s would cross the 2% mark and prove to be a long term positive, as it will have access to Bharat Financial Inclusion’s granular retail loan book, increasing cross selling opportunities and scale benefits.
The note further said, for Bharat Financial Inclusion, the pact entails elimination of political risks paving way for better leverage, no cap on lending rates and funding cost benefits. However, the note said, while the acquisition entails better RoAs , trading multiples may not expand due to rise in the volatile MFI proportion versus historical trend for IIB.