Why Gruh- Bandhan is a poor GathBandhan?

“If you can do no good, at least do no harm.”

― Kurt Vonnegut

Apparently the HDFC board has never heard this. When it met on Monday, 7th Jan to decide on the planned merger with Bandhan Bank this thought never crossed their mind. The apparent reasons for this deal were thrown up in typical investment-banker-double speak: a) Gruh has no presence in the east, which will be complemented by Bandhan. b) Gruh will have access to cheap funds from the bank. c) HDFC is getting a good valuation of 14 times book, which no one else would pay. (that is like saying I would marry my son to anyone as long as the girl fetches me a big dowry).

All of these are typical reasons a la sound-bytes of synergy, perfect fit, complementary biz models, etc. that are bandied out in the wake of any merger proposal. 90% of these fail to materialize. One can understand the Bandhan promoters’ eagerness to enter into this deal, as they are desperate to find a solution to their need to bring down their stake in the bank. But one fails to understand the reasons behind HDFC to do so.

The deal is wrong on several counts and is a lose-lose situation for everybody, barring perhaps Bandhan bank promoters who have managed to bring down their stake in the bank by 20%, albeit in an expensive trade. The deal is most harmful to Gruh shareholders and that has been amply proven in the 3 days post the announcement where the stock has lost over 23% as the shareholders have voted with their feet and exited in droves.

    • Gruh shareholders invested in an HDFC brand company that comes with the stamp of HDFC excellence in management and corporate governance (sadly, this didn’t turn out to be true). These superior qualities were reflected in Gruh’s performance as well as its stock price that was traded at about 20 times book. Expensive, no doubt, but that was the price investors were willing to pay for the HDFC certificate of guarantee.

 

    • If at all the HDFC management felt that the Gruh business model or the stock price was not sustainable over the medium to long term, they should have considered a merger of Gruh with HDFC itself. 58% of the stock belongs to them in any case, and Gruh shareholders would have been happy with a lower swap ratio as they were buying into the parent brand.

 

    • Gruh shareholders had invested in a housing finance company and not a bank. Housing Finance is a niche business while a bank has multiple lending avenues. Again for this reason too, a merger of Gruh with HDFC itself would have been a better outcome for Gruh shareholders. HDFC has exercised its rights as majority shareholder that are strictly not in sync with the stated objects of Gruh Finance.

 

    • It was a Bandhan bank promoter compulsion to acquire a company in financial services, while Gruh had no such pressure. The entire deal seems to have only one raison d’ etre – bailout of Bandhan promoters.

 

    • Having agreed to the deal, the directors of HDFC even agreed to a discount on the prevailing market price of Gruh for the swap ratio. The mode and pricing of the deal sent out two signals to the market- a) Gruh business model was not viable on a standalone basis and b) The valuation of Gruh was totally out of whack in the view of its majority shareholder.

 

    • Bandhan bank shareholders too are not laughing all the way to the bank. They are paying the price for their promoters’ failure to bring down the holding and will continue to do so for some time. Majority of the analysts have given a thumbs down to the deal from Bandhan Bank perspective, reasoning that it has paid too high a price for acquiring Gruh. The deal will be EPS destructive for them in the short term, as also bloat up the equity base permanently.

 

    • What does it mean for HDFC shareholders? No good, I am afraid, on that count as well. The value of their holding in Gruh has gone from about 14000 crores to 10000 crores in spate of 3 days and will further go down to about 8000 crores as they get Bandhan Bank shares in the swap. HDFC’s need to sell 5% to meet RBI norms will keep the share price of Bandhan depressed till that happens.

 

    • That’s not the end of it. Bandhan bank promoters would still need to bring down their shareholding by another 20%- which will mean either another merger deal or sell off into the market. In either case, the supply overhang will mean that Bandhan share prices are likely to remain subdued for a long period of time, unless the Bandhan Bank promoters also do a ‘Kotak’ move.

 

In short, this does not look and feel like a well thought out deal. HDFC may have its basket of reasons to do it, but they are not clear. The deal seems to be wrong on multiple counts of Underlying Reason, Valuation, Protection of Minority Shareholders, etc.. Both HDFC and Bandhan Bank promoters seem to have acted like proverbial bulls in the china shop.

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