Lakshmi Vilas Bank-Indiabulls Housing Finance Merger: While we were busy wondering which PSB will be merged with whom, a new trend has started to take place in the entire financial market. This one would be a merge of a NBFC with a bank, especially since the time of IL&FS default crisis came in limelight. The latest NBFC-bank pair to join hands are Indiabulls Housing Finance and South-India based regional bank Lakshmi Vilas Bank (LVB). A renowned latest mergers are IDFC Bank with Capital First which completed in December 2018, Bandhan Bank with Gruh Finance who have received RBI approval and finally Bharat Financial Inclusion with IndusInd Bank which is also expected to complete shortly. The Indiabulls and Lakshmi Vilas Bank merger news broke in last week, hence, Monday’s trading session saw opposite trends. 

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On Monday, the share price of Indiabulls Housing finished at Rs 858.90 per piece down by Rs 44.25 or 4.90% on BSE. However, the company also touched an intraday low of Rs 853.10 per piece, resulting in an overall 5.54% loss for the day. 

On the other hand, Lakshmi Vilas Bank finished on its upper circuit of Rs 97.35 per piece up by Rs 4.60 or 4.96% on BSE.

The deal! 

LVB will be acquired by Indiabulls which is currently subject to RBI and other regulatory & statutory approvals. 

The merger involves share swap ratio of 0.14:1  which would be 14 shares of IBH for every 100 shares of LVB. Not only this, the directors have proposed a new management structure where - Sameer Gehlaut to be proposed as Vice Chairman of the amalgamated entity; Gagan Banga and Parthasarathi Mukherjee to be proposed as Joint MDs and Ajit Mittal to be proposed as Executive Director of the amalgamated entity.

What do experts believe? 

According to CLSA, the share-swap ratio has been set at 14 shares in IHFL for 100 shares in LVB, implying that LVB has been valued at Rs 127/share or +35% premium to the current price of Rs93 - this price implies 2x PB for LVB. It added, “IHFL will also comply with norms on regulatory assets (SLR, CRR and PSL) and promoters are open to trim shareholding to 15% post-merger from 20%.” 

As per management, the merger could take 6-9 months and they plan to leverage the bank licence to build a stronger deposit franchise. 

Meantime, analysts at Edelweiss Securities said, “Our first impressions about the transaction are: 

1) Structurally positive given the opportunity to transition to a banking platform and build a sustainable and scalable business model. 

2) The deal is subject to the RBI’s and other approvals, which is source of uncertainty.

3) It values LVB’s weak franchise at 3.9x ABV, (premium of >35% to CMP), but we believe strategic value unlocking should outweigh the price. 

4) Robust execution would be needed to churn the platform to tap synergies, and IHFL’s proven track record of execution lends comfort. 

5) Given the combined entity’s scale with a dominant portfolio of INR1.5tn (eight largest private bank) and strategic possibilities, we see business being valued up.”

Thereby, Edelweiss adds, “We view transaction favourably as it improves visibility on IHFL’s long-term growth trajectory. Given IHFL’s good track record, we believe efficient churning of the banking platform will bring forth synergies over the medium term. Given approval etc reflected in IIB-Bhafin, IDFC Bank-Capital First mergers, transition could be long. Maintain ‘BUY/SO.”

Hence, Edelweiss raised its target multiple to 2.7x and revising the TP to Rs 1,104 (from Rs 945). This deal would also positively rub off on regional banks/NBFCs.

As an investor you can make an opportunity of drop in IHFL’s share price, as if we compare it with target price and current value, then the company is seen to rise by nearly 29% ahead.