In a deal timed sweetly with the turnaround in the Indian economy, Kotak Mahindra Bank (KMB) on Thursday snapped up ING Vysya Bank in an all-share transaction valued at an extremely attractive 2.2-2.3 times book value.
ING Vysya will be merged into KMB with shareholders of ING getting 725 shares of KMB of a face value of Rs 5 for every 1,000 shares held of a face value of Rs 10 apiece and implies a price of R790 per share, a 16% premium to the 30-day average.
The merger will put KMB in the fourth spot among private sector banks with a balance sheet of just under Rs 2 lakh crore, a profit of Rs 3,123 crore, a geographically well-positioned branch network of 1,214 branches with a strong footprint in south India and 10 million customers.
Crucially, the merger will take the promoters’ holding in KMB to 34% from 40.07% — the Reserve Bank of India has mandated it to bring down the promoter stake to 30% by 2016 and 20% by 2018. The ING Group, which has the biggest network in Europe, will hold 6.5%.
Equally important, the foreign shareholding in the merged entity, at just 46.9 %, will leave enough headroom for foreign institutional investors to pick up shares. “We will apply for permission to go above 49%,” Uday Kotak, vice-chairman and managing director, said at a press conference. Kotak had earlier tweeted, “We will work to create stakeholder value.”
The dilution in the equity capital of KMB following the merger will be 15.2%. “There is no intention of raising new capital because we have a capital adequacy of 16.5%,” Kotak said.
The complementarity between the two banks is indeed striking — KMB has a larger portfolio of retail assets and will be looking to leverage
ING’s book comprising a higher share of SME and trader loans. “We will look to leverage the SME business,” Kotak said, adding there would be significant savings in product costs and origination costs.
While analysts were anxious KMB’s cost of funds would go up as it pays depositors a 6% interest on savings accounts, Kotak pointed out the bank would gain from a larger current account deposit base. “We will treat any ING Vysya depositor as a Kotak Bank depositor,” he said. ING’s savings deposits total Rs 7,288 crore.
While some banking experts like Ashvin Parikh expressed concern at the difference in the corporate cultures at the banks, others dismissed the concern saying this could be addressed over time.
Uday Sareen, the current CEO-designate of ING Vysya Bank, C Jayaram and Dipak Gupta, joint managing directors of Kotak Bank, and eight other KMB board members will be part of a new management committee that will oversee the merged entity, Kotak said. Kotak hopes to conclude the merger by April 2015.
According to a Bloomberg report, ING Vysya is the only Indian lender controlled by an overseas company and it had a market value of Rs 15,600 crore ($2.5 billion) before the announcement, compared with Kotak Mahindra’s Rs 89,200 crore. Speculation about the deal drove ING Vysya’s shares to a record in Mumbai trading. ING Groep inherited a 10% stake in Vysya Bank when it bought Belgium’s Bank Brussels Lambert in 1998. It raised that investment to 20% in November 1999, and bought Vysya shares from India’s GMR Group in June 2002 to increase its holding to 43.99% from 20%.