Kotak Mahindra Bank to acquire ING Vysya Bank in an all stock deal

MUMBAI: Kotak Mahindra Bank, founded by broker-turned-billionaire banker Uday Kotak, who built it into India's fifth-biggest bank by market value in just over a decade, has clinched a deal with Dutch financial giant ING that will swell the Indian lender's market value and expand its national presence, putting it in a better position to compete with bigger non-state rivals such as ICICI Bank and HDFC Bank.

As a result of the all-stock deal, Kotak will acquire control of Bangalorebased ING Vysya Bank, the two banks announced late on Thursday. "All ING Vysya branches and employees will become Kotak branches and employees" after the deal is completed, the banks said. The transaction is subject to the approval of shareholders, the Reserve Bank of India, the Competition Commission of India and other agencies.

Once approved, the transaction will help nearly double Kotak's geographical reach, increase its earnings by one-fifth and its loan book by nearly two-thirds. ING Vysya's small and medium enterprises (SME) franchise will help complement Kotak's traditional strengths in corporate and retail banking.

Industrialist Anand Mahindra was among the first to congratulate Uday Kotak. The Mahindra Group has a long association with Kotak — its name is part of the bank by virtue of being his first backer.

"Congratulations @udaykotak on a brilliant merger move. The enormous synergies are obvious," Mahindra tweeted. Later, Mahindra told ET: "He's constantly raising the bar and leaping higher and higher and he's constantly making me blink in amazement."

Deepak Parekh, chairman of HDFC, welcomed the announcement and said consolidation was essential to build banks of substantial heft.

"This merger is good for the banking industry," said HDFC's Deepak Parekh. "This will give higher scale in terms of balance sheet size. Consolidation is needed in India. We need bigger banks. We hope, the government should also start consolidating public sector banks."

ING Vysya shareholders will get 725 shares of Kotak for every 1,000 they own. Dutch financial giant ING, which has a 42.73 per cent holding in ING Vysya, will have a 25.3 per cent stake in the merged entity, making it the largest non-promoter shareholder. It has agreed to a one-year lockin voluntarily after the merger. Banking experts see this as an opportunity for Kotak, which is betting big on the expected growth in India's GDP over the coming years.

"In the banking space, one needs to look at the long-term perspective and we have seen in the market-driven M&As a lot of shareholder value has been created over a period of time," said Robin Roy, associate director for financial services at PwC India.

The proposed merger would result in issuance of nearly 15.2 per cent of the equity share capital of the merged bank. Executive Vice-Chairman & Managing Director Uday Kotak's holding will come down to 34 per cent after the merger from 39.71 per cent and will be lowered to 30 per cent by 2016, in line with Reserve Bank of India guidelines.

"The share exchange ratio is considered fair and reasonable given the underlying value of ING Vysya, as also giving shareholders the ability to benefit from the potential that can be realised upon merging into Kotak," a joint release from both the banks said.

This exchange ratio indicates an implied price of Rs 790 for each ING Vysya share based on the average closing price of Kotak shares during the one month to November 19, which is a 16 per cent premium to the same measure of the ING Vysya stock.

The merger move is positive and will strategically fill many gaps for Kotak, Nomura said in a report.

This will increase Kotak's branches to 1,214 from 641 now. Kotak has a 68 per cent presence in the west and north while ING Vysya is strong in the south, especially Andhra Pradesh, Telangana and Karnataka. Kotak will gain 2 million customers from this merger.

The deal will also give Kotak access to ING's key strength in the SME business, which accounts for approximately 38 per cent of its loans.

"This is a momentous occasion that brings together two banking institutions with significant complementary strengths. I firmly believe this merger will pave the way for a bigger and better financial services player with deep Indian roots and global standards of service," Uday Kotak said.

Both stocks rose over 7 per cent on the BSE in anticipation of the deal, which was announced after market hours. Kotak's share price climbed 7.28 per cent to Rs 1,157 while ING Vysya rose 7.15 per cent to Rs 814.20 on Thursday.

ING Vysya is the only Indian lender controlled by an overseas company and it had a market value of Rs 15,600 crore ($2.5 billion) before the announcement, compared with Kotak Mahindra's Rs 89,200 crore, Bloomberg reported. The deal differs from recent shotgun weddings when ailing lenders were forced upon banks which didn't have much of a choice but to accept.