Bharat Financial, IndusInd Bank sign exclusive merger talk deal

No details given on deal structure and timing of talks completion

Bharat Financial Inclusion Limited (BFIL), formerly SKS Microfinance, on Monday said it had signed an exclusivity agreement for a potential merger with IndusInd Bank.

Statements issued by BFIL and IndusInd Bank confirmed months of speculation over negotiations between the two parties. Another potential acquirer, RBL Bank, is now out of contention.

BFIL Chief Executive Officer and Managing Director M R Rao said the merger would result in lower cost of funds and would help the company offer its customers savings products.

On its existing and new initiatives, such as home improvement loan products, Rao said the company would continue to explore these after the merger.

For IndusInd Bank, the immediate benefit will be deeper penetration in rural areas. BFIL has more than 1,400 branches, around 7 million customers and a loan book of close to Rs 11,000 crore. BFIL already works as a business correspondent for IndusInd Bank.

Both parties refused to provide details of whether IndusInd would make an open offer for BFIL shares or it would be an all-stock deal. These issues and whether BFIL will be merged into IndusInd Bank or remain a wholly owned subsidiary are part of the discussions.

According to a July 31 Morgan Stanley report, the valuation of BFIL was still “well below peak levels of the last three-four years, unlike most Indian financials”.

Rao said the parties were hoping to conclude the deal in a few weeks. “The purpose of signing this exclusivity agreement is to discuss terms of the proposed merger, including valuations, based on which the final deal will be structured,” he said.

“The company has entered into an exclusivity agreement with IndusInd Bank for discussion about the proposed potential strategic combination by way of amalgamation through a scheme of arrangement or any other suitable structure,” BFIL informed the stock exchanges earlier in the day.
 

BFIL will be able to migrate its operations involving a little over 6 million rural borrowers to IndusInd Bank’s banking platform, thereby bringing down its business costs.

According to the IndusInd Bank statement, the agreement provides for a mutually agreed exclusivity period for due-diligence and discussions to evaluate a potential strategic combination between the company and BFIL by way of amalgamation through a scheme of arrangement or any other suitable structure.

The BFIL scrip closed at Rs 967.25, up 3.34 per cent, while IndusInd Bank shares rose 5.56 per cent to close at Rs 1,790.65 on the BSE.
 

The deal will bring a degree of business stability for the microfinance company, which has witnessed periodic surges in risk and uncertainty since 2010.

Founded by Vikram Akula in 1997, SKS Microfinance became India’s first microfinance company to go public after it debuted on the BSE in July 2010. But trouble started soon afterwards in its biggest business base, Andhra Pradesh, where, following a spate of suicides by poor borrowers, the state government told people not to repay loans.

The crisis led to a leadership change with Akula quitting the company as its executive chairman the following year.

Currently 98.37 per cent of BFIL shares are held by the public and 86.33 per cent of these shares are with foreign portfolio investors. Though it was reported that a swap ratio of one share of IndusInd Bank for 1.75 shares of BFIL was agreed upon by both parties, Rao described the report as speculation.

Anup Roy contributed to this story