In a move that could kick off consolidation in the banking sector, private lenders Kotak Mahindra Bank and ING Vysya Bank have decided to merge to form a banking entity in an all-stock deal worth Rs 15,000 crore and a combined market capitalisation of over Rs 1 lakh crore.
The proposed takeover deal will make Kotak the fourth largest private bank with combined assets of close to Rs 2 lakh crore after ICICI Bank, HDFC Bank and Axis Bank and help the lender expand its national footprint, especially in the South, and boost its corporate banking business.
M-CAP TO BE OVER RS 1 LAKH CRORE
* KMB board approves swap ratio of 725 shares of Rs 5 each of Kotak Mahindra for every 1,000 shares of ING Vysya of Rs 10 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 branches
* 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 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
PRIVATE BANK MERGERS
* Times Bank was merged with HDFC Bank in February 2000
* Global Trust Bank merged with Oriental Bank of Commerce in August 2004
* Bank of Punjab was acquired by Centurion Bank in June 2005
* HDFC Bank acquired Centurion Bank of Punjab in February 2008.
* Punjab National Bank bought Nedungadi Bank in 2003
* ICICI Bank acquired Bank of Rajasthan in 2010