Merrill buys 50% more in DSP for $500 million

Kothari sells 47.73%, others 2.27%; New owner to seek delisting.

Merrill Lynch will pay $500 million (over Rs 2,300 crore) to increase its stake in DSP Merrill Lynch to 90 per cent from 40 per cent now. The deal puts the valuation of the local investment banking and financial services company to $1 billion (over Rs 4,600 crore).

Merrill Lynch today entered into a share purchase agreement with Hemendra Kothari, its joint venture partner and chairman of DSP Merrill Lynch, to acquire 47.73 per cent stake from him. It will acquire the remaining 2. 27 per cent stake from retail shareholders and delist the company from the bourses. Kothari will continue to be chairman of the company with his 10 per cent stake.

The deal is expected to be completed within six months.

As part of the deal, DSP Merrill Lynch Fund Managers, a wholly owned asset management outfit of DSP Merrill Lynch, will divest 60 per cent stake to Kothari for over $25 million. DSP Merrill Lynch will continue to hold 40 per cent stake in the venture. KPMG did the valuation of the asset management company.

DSP Merrill Lynch Trustee Company will continue as a 51:49 joint venture between Kothari and DSP Merrill Lynch.

Going by the $1-billion valuation of DSP Merrill Lynch and its 2.25 crore equity shares, the deal has put a value of Rs 2,044 on every share of the company, slightly lower than the ruling market price. The DSP stock closed at Rs 2,062 on the Bombay Stock Exchange today, 4.42 per cent higher than yesterday's close.

Kevan V Watts, chairman of Merrill Lynch International and a director of DSP Merrill Lynch, said the move to scale up the holding in the Indian outfit would enable the financial services giant to invest more in the country.

"Merrill Lynch wants to increase investments in India as the future is here. We hope the business in India will be very big in the future."

Merrill Lynch will come out with an open offer for retail shareholders.

The price of the offer would be announced either on Saturday or Monday, said Shitin Desai, executive vice-chairman of DSP Merrill Lynch.

Desai also said DSP Merrill Lynch would place a special resolution pertaining to the delisting of shares at an extra-ordinary general meeting.

"The shareholders of the company had approved a delisting proposal some time ago. But with the change in management control, we thought we should seek their permission once more. In addition, it will be the last meeting of the retail shareholders with the DSP management," Desai explained.

Watts said the board structure would not be affected. "The rationale for the acquisition is to align the Indian outfit with global operations. The structure of the board is not very important in that process," he added.

The DSP Merrill Lynch board consists of four Indian directors and five representatives of Merrill Lynch. In addition to Kothari and Desai, other Indian directors are Amit Chandra (joint managing director) and Prem Saigal.

Desai said Merrill Lynch, which began its relationship with DSP in the 1980s and later the alliance grew into a joint venture, would keep the name of DSP Merrill Lynch unchanged.

The Merrill deal had a rub-off effect on the shares of two of DSP Merrill Lynch's competitors. The shares of JM Financial Ltd, with which Morgan Stanley has two joint ventures, and Kotak Mahindra Bank Ltd, which is involved in share broking and investment banking ventures with Goldman Sachs, jumped after Merrill's announcement.

In a weak market, the shares of JM Financial rose the maximum 5 per cent allowed, to Rs 485.20, while Kotak Mahindra added 6.3 per cent to trade at Rs 239.60.

Goldman Sachs has 25 per cent stakes in both Kotak Securities and Kotak Mahindra Capital Co, and Morgan Stanley has 51 per cent and 49 per cent stakes, respectively, in stock broking and investment banking ventures with JM Financial.

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FINEPRINT OF THE DEAL

Total valuation of DSP Merrill Lynch is $1 bn

Merrill Lynch's stake will go up to 90%, Kothari's stake to come down to 10%

Kothari will continue as chairman; firm's name will not change

Kothari will buy DSP Merrill Lynch's 60% stake in DSP Merrill Lynch Fund Managers for $25 million