After HDFC Twins, IDFC Bank and IDFC Merger, 155:100 Share Exchange Ratio

Just a couple of days after the HDFC merger with HDFC Bank became effective, even IDFC has announced that IDFC Ltd would be merging with IDFC First Bank Ltd in the ratio of 155:100. In other words, shareholders of IDFC Ltd will get 155 shares of IDFC First Bank Ltd for every 100 shares of IDFC Ltd held.

Key terms of the merger agreement

The board of IDFC Ltd has approved the merger of IDFC Ltd and IDFC First Bank with the swap ratio fixed at 155:100. Here are the key highlights of the deal.

• The merger would follow two steps. In the first instance, IDFC Financial Holdings Ltd will be merged into IDFC Ltd and subsequently, IDFC Ltd will be merged into IDFC First Bank Ltd. The swap ratio for the IDFC Ltd / IDFC First Bank merger will be 155:100.
   
• IDFC Ltd is the promoter of IDFC First Bank and it currently holds 39.93% stake in IDFC First Bank through its unit, IDFC Financial Holdings Ltd. Post the merger, and the allocation of shares in IDFC First Bank, the ownership of IDFC Ltd in IDFC First Bank will be extinguished and IDFC Ltd will cease to exist as a separate entity.
   
• The exact effective date for the merger is yet to be announced and that would be subject to the approval of the various regulatory bodies including RBI, SEBI, NCLT, Competition Commission of India and the respective stock exchanges.
   
• The equity and net worth of the merged entity will expand post the merger due to the fresh shares issued to shareholders of IDFC Ltd. The net worth is estimated to expand by nearly 4.9% as an outcome of the merger deal.
   
• The outcome of the merger would be that IDFC Ltd shareholders will now become direct shareholders of IDFC First Bank, which is the principal operation of the group. This also avoids the risk of holding company discount; something the shareholders of IDFC Ltd were currently experiencing. Now they will direct own the operational company.
   
• Under the RBI regulations, holding companies of banks are required to maintain a minimum shareholding of 40% in the banking entity for a period of minimum 5 years from the effective date of license. The five year period had been completed in September 2020, paving the merger for this reverse merger.
   
• The in-principle approval to merge IDFC Ltd and IDFC Bank was taken back in December 2021. As part of the deal, IDFC Ltd was to hive off non-core businesses to add value. The most prominent was the sale of IDFC AMC to the Bandhan Banking group. IDFC group had already exited the broking and distribution business earlier.

Like in any merger deal, it is the swap ratio that is the most important. Let us understand how the swap ratio will work in this case.

How the swap ratio would be operational

Under the terms of the merger approved by the board of IDFC Ltd, the swap ratio for the merger would be 155:100. That means, shareholders of IDFC Ltd will get 155 shares of IDFC First Bank Ltd for every 100 shares of IDFC Ltd held by them. Let us take the stock price of both the listed entities as at the close of July 03, 2023 as the benchmark to check how the trade-off for the swap ratio looks like. Let us assume the case of an investor who holds 1,000 shares of IDFC Ltd.

Post the merger swap ratio of 155: 100, the above shareholder will be allotted a total of 1,550 shares of IDFC First Bank Ltd. Let us see how that is valued today.

Clearly, the swap ratio is advantageous to the investor at the current stock price since it is at a premium of 15.23% to the current value of their investments. Of course, we have to provide for the fact that there will be a 4.9% dilution in the net worth of IDFC First Bank Ltd post the merger. That would offset some of this premium and most likely the post-merger would adjust for this factor.

How the financials of the merging entity look?

Let us take a sneak peak at the financials of the 3 companies involved in the merger viz. IDFC Financial Holdings Ltd, IDFC Ltd and IDFC First Bank Ltd.

1. IDFC Financial Holding Ltd is the non-operational holding company of IDFC First Bank and the former is a unit of IDFC Ltd. IDFC Financial Holdings Ltd has total assets of ₹10,822 crore, net worth of ₹10,785 crore and revenues of ₹3,676 crore. IDFC Financial will first be integrated into IDFC Ltd.
    
2. IDFC Ltd, the group parent company, holds 39.93% stake in IDFC First Bank Ltd through IDFC Financial Holdings Ltd. IDFC Ltd has total assets of ₹9,571 crore, net worth of ₹9,519 crore and revenues of ₹2,076 crore. IDFC Ltd will merge into IDFC First Bank Ltd in the swap ratio of 155:100.
    
3. IDFC First Bank Ltd is the operational bank and is 39.93% held by IDFC Ltd through IDFC Financial Holdings Ltd. IDFC First Bank Ltd has total assets of ₹239,942 crore, net worth of ₹25,721 crore and revenues of ₹27,195 crore. IDFC First Bank will be the eventually surviving company post the merger.

A big bet on banking consolidation

The merger is a bet on consolidation in the banking sector. The business economics are clearly tilting in favour of the large banks and that is what the merger will seek to achieve. IDFC First Bank has substantially improved its footprint in the last few years on consumer banking, digital initiatives and on expanding the base of CASA deposits. For the bank to fruitfully grow its net interest income (NII) and to expand its net interest margins (NIM) on a consistent basis, size is the key. Hopefully, the merger will not only simplify the ownership structure at IDFC Bank but also give an impetus to growth in the years ahead.