What is the deal?
In an all-shares swap deal, Bandhan bank acquires Gruh Finance, a subsidiary of HDFC Ltd. Shareholders of Gruh Finance will receive 568 shares of Bandhan Bank for every 1000 shares of Gruh Finance. The deal valued Gruh Finance at 7% discount and on the Market Price of 4th January 2019. The share of Gruh Finance closed at 305 on 7th January 2019. Though in a long-term deal is really good for Bandhan Bank, in short-term it seems to be a very expensive one. Hence the Share price of Bandhan Bank also fell and closed at 495.55 on 7th January.
Reaction of Brokerage Firms on Bandhan-Gruh merger:
As per Anil Singhvi of Zee Business, both Bandhan Bank and Gruh Finance can correct by more 10-15% in coming days. Macquarie has reduced target of Bandhan Bank to 540 and JP Morgan reduced it to 525. On the face value, this merger looks Win-WIn deal for both the Bandhan Bank and Gruh Finance but the real winner of this deal is HDFC Ltd who has traded off Gruh Finance which was overlapping with their own customer base for getting 14.96% in the merged entity. Credit Suisse increased target of HDFC Ltd to 2150 after this deal.
The effective date of this merger will be 1st January 2019 (retrospectively) subject to approvals from regulators, shareholders etc. After signing the merger co-operation agreement they took joint press conference in which they tried to explain synergies between Bandhan Bank and Gruh Finance and how they can complement each other in making the merged entity a diversified one. Let’s try to understand the deal for the perspective of all the three entities involved in it
How Bandhan Bank will get benefited by this deal?
Bandhan Bank Ltd is the youngest bank in India which started its banking business in 2015. Bandhan which started its business as a micro-finance company in 2001, received a banking licence from RBI in 2014. It is headquartered in Kolkata in West Bengal and has total 974 branches. Founded by Chandra Shekhar Ghosh this bank has managed to command a market value of around Rs. 63000 Crore currently.
RBI’s banking licence ownership norm required Promoters of Bandhan Bank to reduce their stake from 82.3% to 40% within three years of starting the business. The deadline to do this was 23rd August 2018. On Bandhan Bank’s failure to meet the rule, RBI froze the bank expansion and remuneration of CEO and MD Chandra Shekhar Ghosh. This deal will reduce the Promoter’s stake to 61% now. It will have to take more steps to further cut it down and bring it to 40% soon.
From Bandhan Bank’s perspective the swap ratio of the deal is 2.84: 5 which is actually better than what market speculated. Ghosh seized this opportunity to diversify the business portfolio by reducing the concentration risk. Acquisition of Gruh Finance will help Bandhan Bank acquire a low-ticket housing finance portfolio. It will also help them grow inorganically. Bank has a great presence in Eastern and Northeastern India. 80% of the business of Bandhan comes from 37% of rural customers and 35% of semi-urban customers. It completely makes sense to them to acquire Gruh Finance which serves the same segment of income groups wiz ESW and LIG.
46% of outstanding loans of Gruh comes from centres which have a population less than 50000. The acquisition of Gruh will add a huge portfolio of secured loans to Bandhan Bank’s book reducing its heavy unsecured loans portfolio. Bandhan typically gives loans of short terms while Gruh gives loans of Long-term too. This will give a good combination to the merged entity. Gruh Finance has a good presence in Western India. 83% of its business comes from Gujarat and Maharashtra. This merger will give the merged entity presence and penetration from East to West. It is good from the point of view of Financial Inclusion as well as serving well to the bottom of the pyramid.
HDFC Ltd in clear winner in the deal
Gruh Finance is a subsidiary of HDFC Ltd. Gruh has a good presence in rural areas of Western India. HDFC owns 57.8% in the company. After the merger, HDFC will own 14.96% in the merged entity. As per the rule HDFC Ltd. needs to bring down it’s holding in merged entity below 10% soon. HDFC will sell its stake at Premium valuations either in the secondary market or to Public Institutional Investors. HDFC Ltd will now get the best of both the worlds affordable housing finance as well as Microfinance businesses by the entry in the merged entity. Earlier it was overlapping the market of its own subsidiary Gruh in affordable housing segment. Gruh has a network of 195 branches spread across 11 states. This merger will give them access to the distribution network in Eastern part of the country where it has low to no penetration. Bandhan Bank is growing faster and HDFC Ltd. sees great opportunity in it. With this merger, HDFC Ltd has traded off Gruh Finance in exchange of pie in the fast-growing Bandhan bank which has great experience and expertise in Bottom of Pyramid markets of India. This way HDFC Ltd has emerged as a clear winner in Bandhan-Gruh merger.
(Disclaimer: This is an Educational post. Stocksbaazigar Deepak Doddamani is not a SEBI registered Advisor. He is NSE’s certified investment analysis professional and NSE’s certified Marketing profession level- 4. Stocksbaazigar is not responsible for any of your profit or losses. Please consult your financial advisor before taking any Investment decision. Thank you.)