ICICI pays big bucks to merge Bank of Rajasthan

ICICI Bank, India’s No. 2 lender, said it will amalgamate the controversial Bank of Rajasthan (BoR) with itself in an all-share deal.

A tentative swap ratio for the transaction has been announced at 25 shares of ICICI Bank for 118 held in BoR.

ICICI Bank said the final swap ratio will be announced after a due-diligence of BoR is completed by chartered accountancy firm Haribhakti & Co in the next three days.

DNA calculus shows at the 25:118 (or 1:4.72) swap ratio, ICICI Bank will issue about 3.42 crore new shares tantamount to a 3.07% stake dilution, to fund the deal.

At Tuesday’s prices, that would mean a notional payout of Rs 3,039 crore, or Rs 188.35 per BoR share, which is nearly an 89% premium to its closing price of Rs 99.50 on Tuesday.

If one considers the two-week average price of BoR, as per the Securities and Exchange Board of India (Sebi) norm, the premium paid will be a whopping 129%.

Not surprisingly, the street balked.

American depositary shares of ICICI Bank were down 2.6% in early trade on the New York Stock Exchange.

“It is very expensive for ICICI Bank from both a valuation point of view as well as a franchise-valuation point of view,” said Suresh Ganapathy, head of Macquarie Securities financial research team.
Franchise valuation refers to the ratio of market capitalisation to deposits.

“The plus point is the 463 branches of BoR; it gives ICICI a good geographical presence,” Ganapathy said.

“It’ll be an expensive deal also because of bad-loan risks,” said Vaibhav Agrawal, vice-president, research, at Angel Broking.
Why is ICICI Bank paying such a high premium for a bank where there are issues on corporate governance and non-performing loans?

“At that price, ICICI is paying a whopping Rs 6.5 crore per branch to add what are materially small numbers — equivalent to about 4% of its loan book and 7% of deposits base. To raise the same amount of deposits, it would have taken ICICI about 6 months. Also, the deal comes at a price-to-book value of 3 times. It’s not cheap at all,” said another analyst, who did not wish to be named. “More so because there is a risk of further write-downs from the BoR books.” 

Analysts said dilution of equity will also help ICICI Bank bring down marginally foreign shareholding in the bank, which stands at 74% currently.

Is there any other way ICICI Bank can fund the transaction?
“No, it has to be funded by an issue of fresh shares,” said Clyton Fernandes, banking analyst with Anand Rathi Securities.
P K Tayal, chairman, and his kin own about 28% of the small bank at the end of December, according to Bombay Stock Exchange data.

The Tayals have been reported to be negotiating with potential buyers since the past couple of months.

In March, RBI appointed auditors Deloitte, Haskins and Sells to conduct a special scrutiny of the books of accounts of BoR.
Earlier on March 8, Sebi had restrained the Tayals and 100 group entities from accessing the capital markets or from dealing in securities of BoR.

Sebi barred the Tayal group companies, the Silvassa Group and the Yadav Group from dealing in securities.

They had indulged in fraudulent and unfair trading in the shares of BoR, Sebi had said.

“It is prima facie established that the entities have acted in concert with the promoters of BoR with common objective of substantially acquiring share/ voting rights in BoR indirectly for the promoters for the purpose of camouflaging their acquisition,” the Sebi order said.

It also directed the depositories NSDL and CDSL to freeze the accounts of 18 of the 100 entities whose PAN numbers were untraceable.

The Tayals also got into the wrong side of the RBI for disguising the ownership structure of the bank due to which the central bank forced them to unwind stakes.

The amalgamation into ICICI Bank is a culmination of the resultant moral suasion by RBI.