Who gains from the IDFC Capital First merger deal?

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Updated: January 15, 2018 9:41:37 AM

Even as private sector lender IDFC Bank and Capital First, a leading provider of debt to micro, small and medium enterprises and retail consumers, have agreed to merge their businesses, we take a look at what top brokerages have to say about the deal.

After the merger, V Vaidyanathan, chairman and managing director of Capital First, will succeed Rajiv Lall as the MD and CEO of the combined entity. (Image: PTI)

Even as private sector lender IDFC Bank and Capital First, a leading provider of debt to micro, small and medium enterprises and retail consumers, have agreed to merge their businesses, top brokerages point out that the deal favours Capital First. The two companies have agreed to merge their businesses to create a combined entity with assets under management of Rs 88,000 crore and a customer base of 50 lakh. The scheme of amalgamation, to be effective from April 2018, requires IDFC Bank to issue 139 shares for every 10 shares of Capital First, the two companies said in a joint statement on Saturday.

Research and brokerage firm IIFL says that the deal clearly favours Capital First in terms of swap ratio. The firm also said that Capital First still has 10% upside given the ratio of the merger. IIFL said that IDFC Bank is paying a huge premium for acquisition of retail assets. Another, research firm Antique Broking observed that there are no immediate synergies in IDFC Bank-Capital First merger deal. Antique says that Capital First is richly valued due to RoE of 12-13%. It expects long period of consolidation in the valuation of the merged entity.

Research firm CLSA says that the deal will be a postive for IDFC Bank, as it gives the bank a shot at scaling uo its retail business. “The merger nay take 9-12 months time to consummate and will need regulatory approvals,” CLSA said. Accordingly, the firm has upped the target price on the shares of IDFC Bank to Rs 90 from Rs 68.15 earlier.

The arrangement, which is subject to regulatory and shareholder approvals, implies a discount of about 12% to IDFC Bank’s valuation, based on its market capitalisation of Rs 23,019 crore on Friday. Following the arrangement, existing shareholders of IDFC Bank and First Capital will retain ownership shares of about 71.2% and 28.8%, respectively.

After the merger, V Vaidyanathan, chairman and managing director of Capital First, will succeed Rajiv Lall as the MD and CEO of the combined entity. Rajiv Lall will step into the role of non-executive chairman of IDFC Bank and guide the transition process. “A banking platform provides a stable diversified liability base and is critical for building a large franchise. We are excited about this merger because IDFC Bank provides a perfect platform for continued growth of the combined franchise, supported by low-cost funding,” V Vaidyanathan Executive Chairman of Capital First said.

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