The Hindu Business Line : Factors at play in the HDFC Bank-Centurion deal

Chennai, Feb. 26 With the Boards of Centurion Bank of Punjab and HDFC Bank having approved the share swap ratio for the largest merger thus far in the Indian banking sector, at nearly $2 billion, the deal clears an important milestone towards the process of completion, which is expected to take about four months.

“The recommended swap ratio takes into account financial performance and position of the two banks, their relative physical infrastructure and their traded share prices over a long term,” says Mr Sanjiv Agrawal of Ernst & Young (E&Y), in an e-mail interaction with Business Line. “As against the usual company merger cases where High Courts decide , the RBI decides on merger of banks,” he adds.

As reported earlier, E&Y, and Dalal & Shah were appointed as independent valuers by both banks jointly. Mr Agrawal is a partner with the firm’s ‘Transaction Advisory Services’ and heads the ‘Valuation and Business Modelling’ group in India for last 5 years. Through his 20-year career, he has conducted valuations for/of a large number of companies spread across various sectors including metals, consumer goods and retailing, media and entertainment, software, telecom, and financial services.

Here are the excerpts from the interview, in the course of which Mr Agrawal speaks on the factors that lay behind the valuation, and the swap ratio.

First, on your role in the deal.

Our mandate was to conduct the relative valuation of the equity shares of HDFC Bank and Centurion Bank of Punjab (CBoP) as at December 31, 2007 for recommending a share exchange ratio.

To value the shares, we relied upon the audited financial statements of both banks for the financial year ended March 31, 2007, management-certified unaudited financial results of the two banks (including the financial results of the Lord Krishna Bank Ltd) for the nine months ended December 31, 2007.

We also obtained, and relied upon, other information and explanations, from the management of both banks, including their branches network, extraordinary/non-recurring items, outstanding ESOPs (employee stock options) and warrants, existing shareholding pattern and other relevant information and data.

On the factors you considered while valuing the two companies.

HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. The bank, at present, has a network of over 754 branches spread over 327 cities across India, plus a network of about 1,906 networked ATMs across these cities. The bank had issued ESOPs which could be converted into equity shares in the future; this, we considered for the purposes of the present valuation exercise.

The shares of HDFC Bank are listed on BSE and NSE. Its American Depository Shares are listed on the New York Stock Exchange.

CBoP has a nationwide reach through its network of 393 branches/extension counters, 452 ATMs and 180 locations. You may remember that Centurion Bank was renamed CBoP after its merger with Bank of Punjab. With an Appointed Date of April 1, 2006, Lord Krishna Bank was also merged with CBoP.

That the bank has issued ESOPs and warrants, which could be converted into equity shares in the future, was factored into the valuation exercise. The shares of the bank are listed on BSE and NSE, and the GDRs are listed on the Luxembourg Stock Exchange.

On how you arrived at the 29:1 ratio in favour of HDFC Bank.

For arriving at the merger swap ratio, we used the three prevalent methods applied for mergers in India: net assets value (NAV) method, income method and market price method.

For the market price method, we considered price quotations of both banks on NSE and BSE for last 2 years, last 6 months, last 3 months, and last 2 weeks.

We also considered prices at which both banks issued significant amount of fresh capital to institutional investors in the last 6 months.

It may be interesting to note that as per each of these variations of the market price method, swap ratio was coming to around the recommended ratio with 10 per cent range on either side.

Again, swap ratio as per NAV method comes close to the recommended swap ratio of 29 shares of CBoP for every one share of HDFC Bank.

D.Murali

http://InterviewsInsights.blogspot.com

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