Axis Bank and Enam Securities (Enam) have decided to merge their investment banking and equities businesses. The deal size stands close to Rs 2,067 crore.
Brief contours of the deal: Axis Bank will set up a wholly owned subsidiary to which Enam Securities will demerge its investment banking, institutional equities, retail equities and financial product distribution (NBFC) businesses. The bank will demerge its investment banking business into the subsidiary. Swap ratio announced is 5.7 Axis Bank shares for one share held in Enam, implying 3.3% equity stake of Axis Bank (on expanded capital).
What is in it for Axis Bank?: The strategic objective is to harp on synergies between the two entities across products, relationships and geographies. While on the institutional side, Enam?s investment banking and equity franchise will complement the bank?s strengths in debt capital market, project finance and commercial banking franchise; on the retail front, Axis Bank?s distribution platform (1,100 branches) will complement Enam?s retail network. Axis Bank will get the right to use the Enam brand for two years; further, the deal also carries the non-compete clause for (target) businesses for a period of five years.
Our view?value-accretive: The near-term impact of the merger on Axis Bank?s FY11e book value, given the dilution, will be 1.9%. The impact on earnings will be minuscule?dilution of 0.5%. The deal values Enam?s target businesses at around 20x (times) FY11e earnings, at about 25% premium to comparables like Motilal Oswal, among others. However, given the strategic buyout coupled with value accretion expected, and given the strong synergies between the two outfits, we believe the premium is well-justified. We believe the merger to be value-accretive for Axis Bank in the medium to long term as it is a step in the right direction to create a strong Indian financial services powerhouse. With its strong expertise in corporate banking, specifically the infra space, the merger will enable the bank to offer a complete bouquet of financial products and services. The stock currently trades at 2.8x FY12e adjusted book.
Other highlights:
* AMC (asset management company), general insurance, portfolio management and life insurance distribution will remain with Enam, where it will be free to compete with Axis Bank.
* The deal will need approvals of shareholders, regulators and the High Courts of Gujarat and Mumbai and is expected to be completed in four-six months.
* There will also be a statutory lock-in (to be decided by courts/regulators). The board of Axis Bank has proposed to induct Vallabh Bhansali (co-founder and chairman of Enam) as an independent director. Manish Chokhani will be the MD & CEO of the newly formed entity.
* In FY10, equity capital market contributed 41%, broking 40% and retail 9% to overall revenues of target businesses of Enam.
* Of the total compensation, only 90% will go to shareholders of Enam, remaining 10% will go to the employees trust. The benefit will accrue to employees only after three years provided they stay in service.
Risk for Axis Bank: It is a people-centric business and attrition of the top management of Enam could be the key risk; the restrictive clauses, including lock-in and non-compete arrangements, however, dilute the risk.
We maintain the Buy recommendation.
?Edelweiss