Merger Report of HDFC & CBOPAtmakuri Ram Mohan, IFIM Bschool, Bangalore
Snap Shot of Merger
The swap ratio of 1:29 for HDFC-CBOP merger turned out to be more favorable for HDFCBank than expected by the market
The swap ratio was based on the recommendations made by joint valuers Dalal & Shah, achartered accounting firm, and Ernst & Young, a consulting firm.
HDFC held 23.28 per cent in HDFC Bank at the end of December 31, 2007. HDFC will needabout Rs 3,900 crores to raise its shareholding after it falls to around 19 per cent after themerger.
The acquisition of Centurion Bank of Punjab (CBoP) - Rs 9,510 crore in the financial sectorin India. However, the merged entity would still be two-
fifth the size of the country’s
second largest lender, ICICI Bank.
The market cap to branch ratio of HDFC Bank is Rs.721m where the same for CBOP is Rs.238m. Hence, HDFC Bank has been able to buy the franchisee of CBOP at almost one-thirdof what the market is currently giving to its own franchisee.
If HDFC Bank manages to improve the productivity of these branches to even half thelevels of HDFC Bank branches, the merger will become positive in longer term.
The merger was EPS dilutive for HDFC Bank in the interim
The profitability ratios of CBoP are quite low, this looked an expensive proposition forHDFC in the short run
Access to 394 branches of CBoP and an increased presence in southern and northern states
170 of CBoP’s branches lie i
n the North, concentrated in the National Capital Region (NCR,55), Punjab (78), Haryana (28); 150 of its branches are situated in the South, mainly inKerala (91).
Greater access to the North (Punjab and Haryana) as well as the South (particularly Kerala),thereby strengthening its presence in those regions.
CBoP’s strong SME relationships will complement HDFC bias towards highly ratedcorporates thus expanding HDFC’s base.
The creation of India’s 7th largest bank, just behind public giants like Bank of Ba
roda, Bankof India.
Induction of a strong and capable management team with extensive industry experienceand proven capabilities.
Due to an influx of 394 branches from CBoP, there will be a significant increase in thenumber of branches for HDFC
CBoP currently has a weaker asset profile with net NPAs of 1.6% as against 0.4% for HDFCBank. Going forward, HDFC Bank (combined entity) would aim to maintain its NPA profileat these levels, which would require a charge of ~Rs2bn