ICICI – BoR Deal Analysis
Event
ICICI Bank to acquire Bank of Rajasthan Ltd. (BoR)
The Deal
ICICI Bank will offer 25 shares for every 118 shares of Bank of Rajasthan.
| Items | ICICI Bank | BoR |
| Swap Ratio | 25 | 118 |
| Share Outstanding (Cr) | 111 | 16 |
| Pre Announcement Price (Rs) | 890 | 99 |
| Pre Announcement MCap ( Rs Cr) | 99,221 | 1,597 |
| Deal Value (Rs Cr) | 3,042 | |
Benefits to ICICI Bank
ICICI Bank is expected to benefit in terms of an addition of 463 braches of BoR to its existing branch network of 2000 branches, which will in turn enhance its earning potentials, return on assets (RoA) and return on equity (RoE).
Analysis
Expensive Deal…
At a swap ratio of 25:118, the deal value comes at Rs 3,042 cr, translating into a P/BV ratio of 5.4x and 2.9x to the adjusted book value of Rs 559 cr and un-adjusted book value of Rs 1,080 cr respectively as on 31st Dec. 2009.
Valuations paid by ICICI Bank looks very expensive, as public sector banks and private sector banks are currently traded at an average P/BV ratio of 1.2x and 2.2x respectively.
| Private Sector Banks | BV | CMP | P/BV |
| Kotak Mahindra Bank Ltd | 128.8 | 744.2 | 5.8 |
| HDFC Bank Ltd | 469.4 | 1868.8 | 4.0 |
| IndusInd Bank Ltd | 52.7 | 180.6 | 3.4 |
| Axis Bank Ltd | 395.6 | 1205.1 | 3.0 |
| Yes Bank Ltd | 90.8 | 265.4 | 2.9 |
| Dhanalakshmi Bank Ltd | 66.0 | 146.5 | 2.2 |
| Karur Vysya Bank Ltd | 248.1 | 507.2 | 2.0 |
| City Union Bank Ltd | 17.7 | 33.6 | 1.9 |
| ICICI Bank Ltd | 462.9 | 825.0 | 1.8 |
| ING Vysya Bank Ltd | 185.2 | 307.5 | 1.7 |
| Development Credit Bank Ltd | 27.1 | 44.1 | 1.6 |
| United Western Bank Ltd (Merged) | 18.0 | 25.9 | 1.4 |
| Jammu and Kashmir Bank Ltd | 621.0 | 771.9 | 1.2 |
| South Indian Bank Ltd | 129.8 | 152.3 | 1.2 |
| Federal Bank Ltd | 273.9 | 312.9 | 1.1 |
| Karnataka Bank Ltd | 136.8 | 148.7 | 1.1 |
| Lakshmi Vilas Bank Ltd | 73.4 | 79.6 | 1.1 |
| Average | 2.2 | ||
| Public Sector Banks | BV | CMP | P/BV |
| State Bank of India | 1038.8 | 2214.9 | 2.1 |
| Punjab National Bank | 514.8 | 1005.4 | 2.0 |
| Bank of Baroda | 375.7 | 674.7 | 1.8 |
| Union Bank of India | 174.4 | 294.9 | 1.7 |
| Andhra Bank | 90.9 | 128.4 | 1.4 |
| Canara Bank | 305.8 | 423.1 | 1.4 |
| Central Bank of India | 108.2 | 148.5 | 1.4 |
| Indian Bank | 154.7 | 209.3 | 1.4 |
| Bank of India | 243.7 | 323.3 | 1.3 |
| Corporation Bank | 402.6 | 505.5 | 1.3 |
| Allahabad Bank | 131.7 | 153.8 | 1.2 |
| Oriental Bank of Commerce | 292.2 | 324.9 | 1.1 |
| State Bank of Mysore | 575.1 | 622.1 | 1.1 |
| Dena Bank | 83.4 | 89.9 | 1.1 |
| UCO Bank | 65.7 | 70.4 | 1.1 |
| State Bank of Travancore | 568.1 | 591.2 | 1.0 |
| Vijaya Bank | 53.5 | 55.5 | 1.0 |
| IDBI Bank Ltd | 113.1 | 111.6 | 1.0 |
| Bank of Maharashtra | 55.8 | 54.4 | 1.0 |
| State Bank of Bikaner and Jaipur | 483.5 | 442.5 | 0.9 |
| Syndicate Bank | 99.9 | 87.8 | 0.9 |
| United Bank of India | 91.7 | 78.7 | 0.9 |
| Indian Overseas Bank | 116.5 | 92.8 | 0.8 |
| Average | 1.2 | ||
Equity Dilution
Our calculation reveals that at the 25:118 swap ratio, to fund the deal, ICICI Bank will issue about 3.42 cr new shares, which amounts to a 3.1% equity dilution.
Leading to fall in value of ICICI Bank…
Right after the announcement of the deal, share of ICICI Bank shown a heavy selling pressure and finally settled at Rs 825, down by 7.3%. It is interesting to note that ICICI Bank has lost a market cap of around 7,250 cr, which is 2.4 times the deal value. On the other hand, share of Bank of Rajasthan capped at 20% upper circuit, translating into a gain in market cap of Rs 323 cr.
| Items | ICICI Bank | BoR |
| Post Announcement Price (Rs) | 825 | 119 |
| Post Announcement Mcap (Rs Cr) | 91,975 | 1,920 |
| MCap Lost/Gain on Announcement (Rs Cr) | (7,246) | 323 |
| MCap Lost/Gain to Deal Value | (2.4) | 0.1 |
Our View
The motive of merger clearly is related to the branch network. At 463 branches, ICICI Bank adds 22% more branches, which otherwise could have taken up to two years to ramp up organically. Owing to higher valuation paid for the deal, ICICI Bank is looking unattractive at current valuations, however once the benefits from additional branches come into play, will led to improvement in profitability.
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