Federal, LKB merger in trouble

Deal may fall through if today's meeting fails to sort out price differences.

Federal Bank and Lord Krishna Bank top brass are meeting on Monday to take a final view on the proposed merger of LKB with the former.

The two Kerala-based banks have so far failed to reconcile their differences over valuation and the merger proposal is likely to be called off if no headway is made at the meeting.

Federal Bank was willing to pay a maximum of close to Rs 300 crore for acquiring LKB, about two-thirds of what was sought by LKB.

The asking price is nearly thrice the book value of Rs 16.95 per share of LKB. "If LKB does not come down from its stance, the merger proposal is unlikely to go through. Even though the bank has improved its health over the last two years, Federal Bank is not willing to pay the price LKB is demanding," said a source familiar with the development.

The boards of the two banks formally announced the proposal last month as otherwise no due diligence exercise could have been made by Federal Bank for LKB.

"After the exercise, Federal is not willing the raise the price which LKB was hoping to get," the sources said. The boards of Federal Bank and LKB gave in-principle approvals in early October for considering the merger of the two banks if the outcome of the due diligence, valuation and other related studies are found acceptable to both the banks and subject to other necessary approvals.

The acquisition was proposed to be a stock-cum-cash deal. This would have kept Mohan Puri and related entities' stake in the merged entity below the permissible maximum of 10 per cent. Mohan Puri and related entities together hold about 63 per cent stake in LKB.

LKB posted a net loss of Rs 21.76 crore in 2004-05. Federal Bank's net profit last year was Rs 90.08 crore. Federal Bank's capital adequacy ratio (CAR) in March 2005 was 11.27 per cent, while LKB's CAR was 11.74 per cent. LKB's net non-performing asset last year was 4.22 and that of Federal Bank was 2.21 per cent.

Federal Bank has a network of 456 branches covering almost all the important cities in the country with a dominant presence in Kerala with 339 branches.

It has a strong franchise in retail banking, NRI business segment and SME segment.

Lord Krishna Bank has a branch network of 112 spread across 11 States and the Union territory of Chandigarh.

The seeds of its expansion were sown in the 1960s when three commercial banks were merged with it. Today, Lord Krishna Bank has a nation-wide network of 112 branches. With a core value of providing personalised customer services, it has transformed itself into a modern, completely computerised, bank.

A couple of years ago, Lord Krishna Bank was faced with a crisis when its main shareholder Ashwini Puri, who once controlled a 65 per cent stake in the bank, was murdered in a luxury hotel in Luanda, the capital of Angola.

He went there to set up a factory in collaboration with the Angolan government to manufacture leather shoes for the country's armed forces under the banner of his business group - Mohan Exports. Mohan Puri, his son, took over the reins. He is expected to retain a 10 per cent share in the merged entity.