All-stock pact transfers i-banking, ECM arms
Axis Bank, India’s fourth-largest bank in terms of market capitalisation, has acquired the investment banking and equity capital market business of Enam in an all-stock deal valued at Rs2,067 crore. Following this, Enam will become an Axis Bank subsidiary, headed by Enam Director Manish Chokani.
As part of the deal announced today, Enam Securities will demerge its investment banking, institutional & retail equities and related businesses such as distribution of financial products and non-banking financial company to a wholly-owned subsidiary of Axis Bank. The bank will also demerge its investment banking unit into the subsidiary.
Enam shareholders will receive 5.7 shares of Axis Bank for every one share held in Enam, totalling about 3.3 per cent equity stake on the enlarged capital of Axis Bank. Macquarie and Anil Singhvi acted as the advisors to the deal.
Enam reported around Rs90 crore profits in FY10 and about Rs75 crore in the first half of the current financial year. Taking an average of last year’s profits and annualised earnings for the current year, its annual profits work out to around Rs120 crore.
Based on these numbers, the deal values Enam at around 17-18 times (including net current assets) forward multiple, which, according to analysts, is in line with the current market scenario. Analysts said the price looks fair, given that various broking outfits such as IIFL, Motilal Oswal Securities and Emkay are trading at a PE of over 20 times based on trailing 12-month earnings.
The acquisition price looks even better if one were to exclude the net current assets of about Rs300 crore, which is part of the deal. The value of the business being transferred to Axis Bank works out to about Rs1,750 crore. This translates into a PE of 14.6 and compares well with the valuations of broader markets as well, analysts said.
Valuations apart, the deal offers good synergies. “We believe that there are significant synergies, negligible overlaps and a strong cultural fit between the two organisations,” said Shikha Sharma, MD & CEO, Axis Bank. “We have a strong corporate banking and debt franchise, while Enam’s strength is ECM (equity capital market),” she added. Axis Bank has the option of using the Enam brand for two years.
In 2010, Enam was ranked third in the Bloomberg league tables for domestic equity offerings. It helped 23 Indian companies raise more than Rs7,200 crore, pegging its marketshare at 7.7 per cent. Only Citi and Kotak Mahindra Capital boast a higher marketshare.
However, Enam occupies numero uno position as a banker for rights issuances in the current year, with a marketshare of 25.4 per cent.
It has managed three issues amounting to Rs2,308 crore, according to Bloomberg.
Enam reported a profit before tax of Rs77 crore for the period between April 1 and October 20, 2010. The income in the same period was Rs182 crore. For FY10, income was pegged at Rs242 crore.
The deal comes more than five years after the Indian capital market last saw a major deal in the investment banking space. In 2005, Hemendra Kothari exited DSP Merrill Lynch by selling his majority stake to the foreign partner.
While the Axis-Enam deal has been signed, final closure is expected to take up to six months, as regulatory approvals need to be obtained from the Securities & Exchange Board of India and Reserve Bank of India (RBI). The scheme will also require approvals from the high courts of Maharashtra and Gujarat.
Enam will be left with two main verticals: mutual fund and portfolio management services. As part of a non-compete clause, Enam will not be able to enter the investment banking and equities business for a period of five years.
“Enam and its founders cannot compete in any of the areas where business has been transferred to Axis Bank,” said Enam Chairman Vallabh Bhanshali while addressing the media. Around 400 Enam employees will move to Axis Bank as part of the deal.
The acquisition is expected to provide a strong fillip to Axis Bank’s share in capital market transactions, as Enam is one of the leading investment banks and has been part of most large equity offerings, including Coal India.
The agreement with Axis comes more than three years after reports first suggested that Enam is planning to sell a sizeable stake. In 2007, it was widely reported that Japanese major Nomura would buy over 30 per cent stake in Enam in a deal valuing the Indian entity at $1 billion. It is believed to have fallen through on valuation issues. Enam was also reported to be in talks with JP Morgan.
The board of Axis Bank has also proposed to induct Bhanshali as an independent director. This will be subject to approval by shareholders and RBI. Meanwhile, Manish Chokhani will be MD & CEO of the newly formed entity, according to a media release.
Enam and Axis Bank will continue their respective 'buy side' and investment management businesses separately, as these do not form part of the transaction.
