Kotak buys ING Vysya in all-share deal

Swap ratio fixed at 725:1,000; promoter stake in Kotak Bank to come down to 34%

Kotak Mahindra Bank on Thursday announced it was acquiring Bengalaru-headquartered ING Vysya Bank in an all-stock deal. ING shareholders will get 725 Kotak Bank shares for every 1,000 shares they hold.

The deal will make Kotak the fourth-largest private bank in the country in terms of total business. The biggest three are ICICI Bank, HDFC Bank and Axis Bank, in that order. The combined banking entity will have a widespread network of 1,214 branches across the country.

The deal implies a price of Rs 790 for each ING Vysya share, based on the average closing price of Kotak shares during the month to November 19, valuing the deal at around Rs 15,000 crore. That was a 16 per cent premium to a like measure of ING Vysya market price, Kotak Bank said in a media statement.

 

The proposed merger would result in issuance of around 15.2 per cent of the equity share capital of the merged Kotak.

The deal will need regulatory approvals, including those from the Reserve Bank of India and Competition Commission of India. The management of the banks expect the new entity to be operational by April 1, 2015.

ING Vysya’s CEO-designate Uday Sareen will be inducted into the top management of Kotak; that is, operating management committee, reporting directly to Kotak Mahindra Bank Executive Vice-Chairman & Managing Director Uday Kotak. All ING branches and employees would become Kotak branches and employees.

ING Vysya Bank Director Vaughn Richtor said: “We were not desperate for the merger. But the logic in the merger is so compelling that you cannot turn it down. It is the right strategic thing to do.”

 

The deal will also help Uday Kotak reduce the promoter’s stake in Kotak Bank, in line with the road map given by the Reserve Bank of India. After the merger, promoter shareholding in Kotak Bank will come down from 40 per cent to 34 per cent. The RBI had asked Kotak to lower this to 30 per cent by December 2016.

With ING Vysya nearing the foreign shareholding cap of 74 per cent, this merger would yield more liquidity and significant headroom for foreign money, as the foreign shareholding after the merger would be 47 per cent, the press statement said. The promoters hold a 42 per cent stake in ING Vysya Bank.

After the merger, the ING group, with a 6.4 per cent stake, will become the second-largest shareholder in the bank. According to regulations, RBI’s approval is required for an entity other than the promoter to have more than five per cent stake in a bank.

Kotak told reporters ING would have a one-year lock-in period for the shares it holds. An ING representative will also be inducted into Kotak Bank’s board.

He said he was very excited about working with ING, as the merger created significant complementary strengths.

“Kotak values the diversity of ING Vysya and welcomes it to the family. We will work towards a smooth integration for an exciting journey that is ahead of us.” He said the merged entity was expected to begin operations by April 1 next year.

Kotak also said the combined entity would leverage ING’s digital banking strengths, evident from the fact that ING was among the top two or three consumer banks in Germany with zero branch presence. Kotak bank would also leverage ING’s expertise in international corporate banking.

There would be very little overlap in terms of branches and the top eight cities would account for a third of the total number of branches of the merged entity, Kotak said.

The deal will give Kotak a significant ramp-up in its branch presence in South India. At present, 46 per cent of its branches are in western parts of the country. Kotak’s strength lies in retail business, while ING’s strong point is its small and medium enterprises (SME) clientele. The deal will enable Kotak to further diversify its loan book.

Kotak Mahindra shares on Thursday rose 7.4 per cent on BSE to Rs 1,156.70, while ING Vysya surged 7.8 per cent to Rs 816.95, after speculation about the deal drove the latter’s share price to a record high.

According to a report by Espirito Santo Securities, released earlier in the day, ING Vysya would offer Kotak Mahindra access to southern states like Andhra Pradesh, Karnataka and Tamil Nadu, where the latter has limited footprint. Additionally, it would gain access to urban areas, given that more than 65 per cent of ING Vysya’s branches are in urban and metro regions, unlike most other regional and old-generation banks.

“A merger would give Kotak access to a larger urban distribution network, which will help it improve its liabilities franchise,” the report said. It said the merger would be a good fit for Kotak Mahindra Bank, based on an evaluation of access to liabilities and customer base, access to new products/talent and the opportunity to expand to new geographies.
Disclosure: Kotak Mahindra and associates are significant shareholders in Business Standard Limited