The Kotak Mahindra Bank’s all-share acquisition of the mid-sized player ING Vysya has been agreed for at a value of 150 billion Rs, around $2.4 billion. Announced on November 20, 2014, the Kotak Mahindra – ING Vysya deal becomes India’s biggest financial institutions takeover, exceeding the 2008 HDFC Bank Ltd.’s purchase of Centurion Bank of Punjab Ltd. (95.1 billion Rs when announced).

Kotak Mahindra Bank is controlled by the billionaire Uday Kotak and has a current market value of about 890 billion Rs ($14 billion), over five times higher than the 150 billion Rs market value reported by ING Vysya. Synergies, considerably improved transaction costs and extended geographic reach are only some of the benefits Kotak Mahindra will gain from the deal, embarking itself on a journey of growth.

Industry Overview

Four classes of banks characterize the Indian banking system: the Public sector banks, the Private sector banks, the Foreign banks and the regional rural banks. The business has been controlled by Public sector institutions since the two main Nationalization programs carried out by the Indian Government in 1969 and 1980 in order to affect the economic development more directly and efficiently. However, after the Government liberalized the sector in the early 1990s authorizing many new private banks, these grew rapidly benefitting from new technologies and introduced competition in the previously outdated banking system. By financing competitively the rapid growth of the Indian economy, the main Private sector banks (namely ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra) grew fast. Nowadays, despite having definitely less branches than the State Bank of India and the other state-controlled banks, Private banks have remarkably high market capitalization.

In particular, Kotak Mahindra is a financial conglomerate that began its activity discounting bills in 1986, then expanding to leasing, investment banking, asset management, online brokerage and insurance and finally converting itself to commercial banking in 2003, building up a vast network of branches in Western and Northern India. As of November 25, Kotak Mahindra is the fifth Indian bank by market capitalization, with almost 900 billion Indian Rs ($14 billion), and the fourth between the Private sector banks. The Bangalore-based ING Vysya (controlled by the Dutch ING Groep with a 44% stake) with a market capitalization of 150 billion Indian Rs ($2.4 billion), ranked seventh between the Private sector banks, and it is well positioned in Southern India.

Transaction drivers

Through the purchase of ING Vysya, Kotak Mahindra Bank will almost double in size, from 643 to 1,216 braches. The acquisition will improve the operating profile of the entity by dramatically enhancing its geographical reach, especially in Southern India. Kotak Mahindra will be able to create strong cross-selling opportunities for brokerage, life insurance products, investment banking, wholesale lending and small-business banking. In addition to the present network expansion, the combined entity is expected to face lower costs to build up additional branches in the future and to diversify business operations.

The deal was also driven by recent regulatory issues: Mr. Uday Kotak, Executive Vice-Chairman and Managing Director of the company, was mandated to dilute his shares by 10% before December 2016. Through the acquisition, Mr. Kotak effectively dilutes his stake from 40% to 34%.

ING Vysya expects to close the deal with a considerable gain for its shareholders. The $2.4 billion transaction represents a 16% premium to ING Vysya’s one-month average price (Oct 19th – Nov 19th). The entity is expected to have an overall improved operating profile, a stronger Indian network, compliance benefits and growth synergies.

Terms and Structure

Kotak Mahindra has a return on equity equal to 14.26% versus the 8.90% of ING Vysya: the merged entity annualized ROE is expected to be 12.83% with a consolidated annualized profit in the region of 17.4 billion Rs ($281 million).

Kotak Mahindra key management also assures that there are no plans for massive rationalization of branches or capacity and that Kotak Mahindra is totally committed in growing without any interest in cutting.

Reacting immediately to the news of the acquisition, Kotak Mahindra Bank (KMB:IN) rallied as much as 7.57% in intraday trade to hit its fresh 52-week high of Rs 1,159.15 last week and it is now traded at Rs 1,199.75 per share (as of November 24, 2014 closing price).

ING Vysya Bank (VYSB) recorded an even more remarkable increase, surging 12.58% in trade to hit its fresh 52-week high as well of Rs 864.80 and it is now traded at Rs 812.10 per share (as of November 24, 2014 closing price).

The transaction involves a share swap: shareholders of ING Vysya will get shares of Kotak Mahindra Bank as per the swap ratio of 725 shares of Kotak Mahindra for every 1,000 shares held by them in ING Vysya. The exchange ratio implies a price of 790 Rs per ING Vysya share, resulting in a 16% premium to the comparable ING Vysya market price, based on the average closing price in the month before the announcement date, ended November 19, 2014.

ING Vysya’s acquisition represents a price to book (P/B) value multiple of 2.1/2.2x and it will be +7/8% EPS-accretive and +10% book-accretive for the post-merger entity.

The proposed deal would also result in issuance of approximately 15.2% of the equity share capital of the final entity. Considering the main stakes in the post-merger company, the Dutch financial services ING Groep, which owns roughly 42.73% of ING Vysya, has indicated that it supports the proposed transaction and it will become the largest non-promoter shareholder (the second largest overall) in Kotak Mahindra after the deal, with an estimated holding of 6.47%.

The largest shareholders will remain the Kotak family with a 34% stake in the merged bank, while the current Kotak’s largest institutional investor, the Canadian sovereign wealth fund CPPIB, now owning 4.65%, would come down to 3.9% after the deal.

The transaction is now subject to the approval of Kotak Mahindra and ING Vysya shareholders, the Reserve Bank of India and the Competition Commission of India (CCI). Kotak Mahindra Bank hopes to get regulatory approvals by April 1, 2015, in order to close the deal in the second half of 2015.

In conclusion, without taking into account legal advisors and parties that undertook due diligence reviews for the companies, four main financial advisors have been involved in the transaction. S.R.Batliboi & Co. and PricewaterhouseCoopers are the independent advisors appointed by Kotak Mahindra and ING Vysya, respectively. Avendus Capital Private and Edelweiss Financial Services provided a fairness opinion to Kotak Mahindra and ING Vysya.

To contact the authors:

Adele Bertolino                    adele.bertolino@studbocconi.it

Alessandro Caiumi              alessandro.caiumi@studbocconi.it

Giulio Giacomo Coperti       giulio.coperti@studbocconi.it

Steven Suskauer                steven.suskauer@studbocconi.it

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