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Bandhan-Gruh Finance merger favours HDFC, no one else

Gopika Gopakumar
The Bandhan-Gruh Finance merger deal has allowed HDFC an exit at a really attractive valuation. A stake in Bandhan Bank, in return, is simply a cherry on top

Mumbai: Bandhan Bank Ltd's merger with Gruh Finance Ltd appears to be a deal that was born out of compulsion and is anything but sweet for minority shareholders of the bank and the mortgage lender, analysts said.

The crash in share prices of Bandhan Bank and Gruh Finance following the merger announcement points to that effect. In the past two days, Bandhan Bank has dropped by around 10% to ₹477.05 on BSE, while Gruh Finance, controlled by Housing Development Finance Corp. Ltd (HDFC), has plunged by around 20% to ₹256.

The deal favours HDFC more than the shareholders of Bandhan Bank and Gruh Finance, according to five people that Mint spoke to.

For the Gruh Finance management, the merger discussions came as a surprise, said two of the five people directly aware of the Bandhan-Gruh Finance deal.

“There was never a talk about monetizing Gruh Finance. The discussion with Gruh (management) happened just two weeks back. The firm would have preferred to continue as a stand-alone entity. There was no reason for merging with anyone,” said the first person, who is close to HDFC Group. “HDFC was getting a good valuation for selling Gruh Finance stake and therefore wanted to monetize the business. They were also entering the same business portfolio and would have been finding it difficult to explain to their stakeholders.”

Yes Securities (India) Ltd called the merger “a complementary but expensive fit for Bandhan”, referring to the price paid by the bank to acquire Gruh Finance.

A JPMorgan research note termed the merger an expensive proposition for Bandhan Bank.

“Gruh Finance trades at 14 times its book value and hence is an expensive proposition for Bandhan Bank… Further, merger synergies will not likely be very material, in our view, given the limited overlap in the core competencies of Bandhan (micro finance with a focus on East India) and Gruh Finance (rural housing),” said the JPMorgan India note.

Bandhan Bank on Monday evening announced the acquisition of Gruh Finance through a share swap, in a deal effective 1 January 2019.

The bank said the merger would enhance shareholders' value, help new product development and enable the two lenders to further their socio-economic objectives.

Although the acquisition gives Bandhan Bank a readymade home finance portfolio and helps the bank diversify its business, Mint's conversation with the people concerned with the merger indicated that rather than shareholder value, it was the premium offered to HDFC by Bandhan Bank that might have swung the deal, according to three people aware of the matter, including the one close to HDFC Group who has been cited earlier.

Proxy advisory firms say the deal hurts shareholders of Bandhan Bank and Gruh Finance due to overvaluation of Gruh and removal of HDFC's parentage from Gruh Finance.

“This merger has been done more out of compulsion due to RBI's diktat rather than business synergies or the interest of minority shareholders,” said J.N. Gupta, managing director and founder of proxy advisory firm Stakeholder Empowerment Services Ltd.

“Gruh Finance was indeed overvalued but the market sentiment was positive and that's why the stock was holding on to higher levels. Now, following the merger, small shareholders are bound to lose more; they have lost the premium they were enjoying. Even though the premium offered by Bandhan Bank is high, but the return for Gruh Finance shareholders is eroding steeply and fast,” added Gupta.

Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, said the minority shareholders of Gruh Finance would feel shortchanged.

“Eventually, the price of the stock (Gruh) was much richer than the intrinsic value, though even in the stock swap, they have got a rich valuation compared to peers. The minority shareholders of Bandhan Bank would feel that the price paid by Bandhan is high due to the compulsion of the promoters to dilute their stake,” added Subramanian.

“Because of the drop in stock prices, a new Gruh Finance shareholder would be able to get more Bandhan Bank shares than earlier,” Gupta said. “This is somewhat against the interest of Bandhan Bank's minority shareholders. And if Gruh Finance falls further in the coming days, it will get worse for Bandhan Bank shareholders.”

“In this whole deal, HDFC is the major winner as it is able to exit this investment at a very relatively attractive valuation (14 times the book value). In turn, they have got shares of Bandhan, which is at a much cheaper valuation and better growth prospects,” said Ashutosh Mishra, head of research, Ashika Stock Broking.

A year ago, HDFC had bid for Can Fin Homes and has now exited its own housing finance sector, raising concerns among analysts, especially after the liquidity crisis at non-banking financial companies.

“The deal values Gruh Finance at around ₹20,900 crore, which is at a 7% discount to yesterday's (Monday's) market capitalization. On a concurrent basis, Bandhan is paying nearly two times of its own valuation to acquire Gruh Finance,” said Yes Securities. This may explain why Bandhan Bank's stock, too, has been falling.

Earlier on Monday, Mint reported that Bandhan Bank was set to acquire Gruh Finance, primarily to help Bandhan Bank founder Chandra Shekhar Ghosh comply with the Reserve Bank of India's promoter shareholding norms.

Bandhan Bank said in a stock exchange filing that the share swap ratio for the amalgamation would be 568 shares of Bandhan Bank for every 1,000 shares of Gruh Finance. This essentially means a share-swap ratio of 0.6, or 3:5, between Bandhan Bank and Gruh Finance.

The share swap ratio implies that the pricing for the Bandhan-Gruh merger is in line with the six-month weighted average price of the two companies.

The six-month weighted average prices of Bandhan Bank and Gruh Finance are at ₹552.64 and ₹318.50 apiece, respectively, on BSE.

HDFC holds 57.83% in Gruh Finance as the promoter, while Bandhan Financial holds around 82.28% in Bandhan Bank.

Since the Bandhan-Gruh Finance merger is being carried out on the basis of six-month weighted average price, the Bandhan-Gruh Finance merger will result in HDFC's holding falling to around 15.44% in the merged entity and Bandhan Financial's holding dropping to around 60.27%. However, the merger won't really solve the core problem for Bandhan Bank. To meet the bank ownership norms, Bandhan Financial will have to lower its stake further from 60.27% to 40%.

In September, RBI restricted Bandhan Bank from opening new branches and ordered a freeze on the remuneration of its managing director and chief executive officer Chandra Shekhar Ghosh for not meeting the bank promoter shareholding norms.