HDFC is the biggest winner in Bandhan-Gruh Finance merger

News of Bandhan Bank Ltd’s purchase of Gruh Finance Ltd sent the former’s shares crashing over 6% on Monday. From Bandhan Bank’s perspective, the merger share swap ratio of 2.84:5 is slightly better than what news reports had suggested. The dilution in its equity will be about 1.5% lower compared to a scenario where the share swap ratio was set at 3:5, which isn’t much to celebrate.

Investors are seeing this as a desperate attempt by Bandhan Bank to reduce its promoters’ stake and meet the Reserve Bank of India’s (RBI’s) shareholding norms. If the deal materializes, Bandhan Bank’s promoters will own 61% in the bank, down from 82.3% currently. It still needs to do more to reduce promoter holding to 40%, to meet RBI’s rules.

This is particularly worrisome because coming to the halfway mark of the target has itself been an extremely expensive affair. For the deal, Gruh Finance has been valued at an exorbitant valuation of 13.6 times its net worth as on September 2018, while Bandhan Bank’s price-book valuation was pegged at less than half those levels at 6.45 times. This isn’t very far from the average share price of the two companies in the past six months.

Ironically, one of the reasons Gruh Finance enjoys such a high valuation is on account of its parentage. Housing Development Finance Corp. Ltd (HDFC) owns 57.8% in the company. With the deal, Gruh Finance will actually lose this exalted status; although Bandhan Bank has ended up buying the whole company at high valuations.

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