Kotak Bank buys ING Vysya for Rs 15,000 cr in biggest merger

 In India's biggest banking merger, private sector lender Kotak Mahindra Bank today announced the buyout of ING Vysya Bank in an all-stock deal valued at Rs 15,000 crore, which is likely to set off consolidation moves ahead of the entry of new players.

"This is a momentous occasion for Kotak Mahindra Bank, and ING Vysya Bank and the country's financial sector as a whole. We are truly excited about our lives together," Uday Suresh Kotak, Executive Vice-Chairman and Managing Director of Kotak Mahindra Bank said at a late evening press conference.

The all-stock deal values ING Vysysa stock at Rs 790 a share, which is a 16 per cent premium to the 30-day stock price as of November 19, while pegging Kotak Bank at Rs 1,119 a share in similar manner. Accordingly, ING shareholders will get 725 Kotak Bank shares for 1000 shares of the Bangalore based lender. This values ING Vysya Bank at Rs 15,033 crore.

Post-deal, ING Groep NV will hold 6.5 per cent in the combined entity, while Kotak promoters stake will be diluted to 34 per cent from 40.12 per cent. By December 2016, Kotak has to bring down his stake 30 per cent as per RBI norms. We will now have time till December 2016 to trim promoter holding down to 30 per cent, Kotak said.

With 6.4 per cent stake in Kotak Bank, ING will be the second largest stakeholder. The merger will result in Kotak Bank issuing 16.5 per cent additional shares. The Dutch promoter holds around 43 per cent in ING bank, and based on ING Vysya's book value as of Sept 30, ING will book a net profit of about USD 188 million from the deal, according to analysts.

All ING branches, will become Kotak Mahindra Bank branches post-merger and all the ING employees numbering around 10,000 will come to the Kotak Bank's rolls. The new entity will have 1,214 branches and 1,794 ATMs. The combined bank will have a total asset of close to Rs 2 trillion and a market capitalization of around Rs 1 trillion at today's closing price.

Shares of Kotak Bank rose over 7 per cent and ING Vysya over 5 per cent. Last merger in the private banking space took place when ICICI Bank was nudged by the government and the RBI to take over Bank of Rajasthan in 2010. Prior to that Centurion Bank was merged with HDFC Bank in 2008, and Global Trust Bank was taken over by the state-run Oriental Bank of Commerce in 2001-in distress moves.

The merged bank will have a CAR (Capital Adequacy Ratio) of a comfortable 16 per cent and Kotak ruled out any immediate plans to raise debt. The proposed deal, which is likely to be completed by April 1 next, is subject to regulatory approvals. This would be the first merger in banking sector to be cleared by CCI. Analysts gave thumbs-up to the deal, saying this is good for both the parties as well as the industry.

Ashvin Parekh of Ashvin Parekh Advisory Services described the deal as a strategic buy for Kotak Bank. "The deal is good for Kotak Bank from strategic point of view. But we need to see whether it can retain present RoA (Return on Assets) of 1.8 post-merger as ING's RoA is only 1.2 now. Kotak Bank has to ensure the efficiency it was having all these years to make the deal a win-win," Parekh said.

Grant Thornton India Director for Financial Services Advisory Services Aman Bhargava said: "Public sector lenders still dominate the banking sector in the country.

Most private sector banks do not really have national coverage and are regional players at best. "Consolidation, especially amongst the private sector players, is probably the quickest and most efficient way forward to attain the size and geographical coverage to compete for retail customers in a growing economy," he said.

Kotak attributed the geographical synergy as the primary driver for the deal, saying ING's strong presence in the South will complement Kotak's strengths in the North and Western regions. He stressed that "blatant and brazen cost rationalisation" is not the motive behind the merger.

ING's newly-appointed deputy chief executive Uday Sareen, who will join the operating management committee of the merged bank, said employees are at the heart of the deal and there will not be any cost-cutting, but cost efficiencies post-deal. Post-merger ING will have a board position on Kotak Bank, Kotak said, adding ING has volunteered for a one-year lock-in for its 6.5 percent stake.

On integration, Sareen said it will take 3-6 months after all approvals are in place, while Kotak Bank Joint MD Dipak Gupta said it will take up to a year for full integration. Earlier, Kotak said the relationship between the two entities goes back to a long time and ING in fact held some stake in Kotak Bank till 2007.

Asked whether the deal will change his plans to exit the bank, outgoing ING Vysya Bank Chief Executive and Managing Director Shailesh Bhandari said the merger does not change his plan to leave the bank by end of January next. Bhandari was at the helm of erstwhile Centurion Bank was merged with HDFC Bank in 2008.

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