Kotak Mahindra Bank on Thursday announced its decision to acquire ING Vysya Bank in an all-share transaction, amounting to about R15,000 crore. Anticipating the deal, the two lenders saw huge buying interest on the Street — the merger was announced after market hours. While Kotak Mahindra Bank surged 7.28% to settle at R1,157.05 on the BSE, the ING Vysya Bank rallied 7.15% to end at R814.20. During the day, Kotak Mahindra shares jumped 7.9% to hit all-time high of R1,163.70 and ING Vysya zoomed 13.81% to hit its lifetime high of R864.80. ING Vysya Bank witnessed a spike in the traded volume on Thursday. Around 63 lakh shares changed hands on BSE and NSE against 30-day average volume of mere 2.8 lakh shares, while combined volume of Kotak Mahindra rose nearly four-times to 38.7 lakh shares against one-month average volume of 10 lakh shares. Analysts appear enthused about the move, with Macquarie Securities stating in a report that ING Vysya would be an ideal target for Kotak as “there are less culture issues compared to other old private sector banks that have old workforces and considerable productivity and trade union issues. Secondly, Kotak hardly has a presence in the South, unlike ING Vysya — which, therefore, offers a complementary fit”. Analysts add that the merger would increase Kotak’s presence in the SME segment. “Kotak is still largely an urban retail platform (50% of loans), ING Vysya’s key strength lies in SME/business banking (~38% of loans) — the move would close the vital product gap for Kotak as currently SME is just 8% of its loans,” said Japan-based financial advisory firm Nomura.
Nomura analysts add that while Casa ratios for Kotak and ING Vysya are similar at 32-33%, but since SME banking is Casa-heavy, liability franchise in the long-run would benefit.
“This is a momentous occasion that brings together two banking institutions with significant complementary strengths. The opportunities and synergies that this merger will create will place Kotak and its incoming stakeholders from ING Vysya on a new trajectory of excellence and leadership”
— Uday Kotak, executive V-C & MD, KMB
-KMB board approves swap ratio of 725 shares of R5 each of Kotak Mahindra for every 1,000 shares of ING Vysya of R10 each
-The deal is subject to shareholder and regulatory approvals
–Uday Kotak, Kotak Mahindra Bank’s promoter, needs to reduce his stake from the current 40% to 20% over the next four years to meet regulatory requirements. After the merger via the swap deal, his effective stake would reduce by 6 percentage points, to 34%
Economics of the deal
-The deal would more than double Kotak Mahindra Bank’s branch network. “A 17% equity dilution for a 90% increase in branch network is not bad economics,” says Macquarie Securities. Except for some metro locations, branch overlap will be very low with ING Vysya having 66% of its branches in South India and Kotak 68% of its branches in West and North India, says Nomura
-Upon merger, Kotak will have 1,214 brances
-Kotak’s value per branch and profits per branch are currently 5x and 2x those of ING Vysya Bank, respectively.
-The merger will help ING Vysya’s bid to meet Basel III
Terms of the merger
-The merger will catapult KMB to nearly R2 lakh crore balance-sheet size, ahead of entry of new players
-ING Group NV, which holds 42.73% in ING Vysya Bank, will become the second largest shareholder in KMB at 6.5%
-The share exchange ratio indicates an implied price of R790 for each ING Vysya share based on the average closing price of Kotak shares during one month to November 19, 2014, which is a 16% premium to a like measure of ING Vysya market price
-The merger would result in issuance of approximately 15.2% of the equity share capital of the merged Kotak