ICICI Bank’s move to amalgamate Bank of Rajasthan (BoR) with itself at a 1:4.72 ratio indicates the bank would pay a premium of 89.4 per cent to Bank of Rajasthan’s closing stock price on Tuesday.
The proposed swap ratio values BoR at Rs 3,040 crore, translating into a per branch value of only Rs 6.57 crore, given its 463 branches. In contrast, HDFC Bank had paid around Rs 23 crore for every branch of Centurion Bank of Punjab when the deal was sealed in February 2008. In this context, the deal looks to be a steal for ICICI Bank.
On the other hand, the per branch market valuation of Karnataka Bank and South Indian Bank work out to Rs 3-3.5 crore. The two banks are old-generation private banks like BoR. However, analysts said the market was perhaps giving a lower value to the two banks, as it takes Rs 2-3 crore to set up a branch. And, typically, over 12 months to break even.
The deal, if approved, would increase ICICI Bank’s equity capital by 3.07 per cent to 1.15 billion shares. As BoR is a loss-making entity, the merger will be marginally negative in terms of earnings. This means ICICI will have to slog in the initial months before the benefits of the deal accrue.
The immediate benefit will be a 23 per cent increase in ICICI Bank’s branch network, especially in North India, where 60 per cent of BoR branches are located. This is of key importance, considering that ICICI has now moved to a branch-led business model. The acquisition will help ICICI increase CASA (current and savings account) flows, as also help in cross-selling products. With both banks working on the Finacle platform, integration will also be less taxing.
What’s more, with nearly 2,500 branches, ICICI Bank will steal a march over its nearest private sector rival, HDFC Bank, which had 1,725 branches at the end of March.