BoB merger with Dena Bank, Vijaya Bank: Should you buy the merged entity?

Dena Bank share price was the worst hit, losing a whopping 20 per cent after Bank of Baroda (BoB) board announced the merger ratio for the 'amalgamation' with Dena Bank and Vijaya Bank, which experts believe is fair for BoB's shareholders but not so much for those of Dena Bank and Vijaya Bank. Going by fundamentals, however, the merger is highly favourable for Dena Bank and little unfair to Vijaya Bank.

Reacting to the announcement, Dena Bank share price shed as much as 19.77 per cent to Rs 14.40 on the BSE, while Vijaya Bank share price slipped over 7 per cent to hit its intraday low of Rs 47.25. Bank of Baroda reacted positively, gaining 3.3 per cent to Rs 123.35.

Merger ratio mechanics

The boards have decided a merger ratio of 110 BoB shares for every 1,000 shares of Dena Bank and 402 BoB shares for every 1,000 shares of Vijaya Bank.

As per January 2 closing price, Vijaya Bank's 1,000 equity shares amounted to Rs 51,050 against 402 equity shares of BoB worth Rs 47,939, translating into a loss of 6 per cent. Likewise, the market value of 1000 shares of Dena Bank, stood at Rs 17,900 against BoB's 110 equity shares worth Rs 13,118, translating into a loss of 27 per cent.

G.Chokkalingam, Founder & Managing Director, Equinomics pointed out that going by January 2 closing prices, shareholders of Dena Bank are at maximum loss. "Ideally Vijaya Bank shareholders should have got an offer of 510 shares instead of 402 shares of BoB for every 1,000 shares held in Vijaya Bank. Similarly, in the case of Dena Bank, only 56 shares of BoB should have been offered instead of 110 shares," he said.

Going by fundamentals, however, the merger ratio is positive for Dena Bank, and slightly negative for Vijaya Bank.

"If we go by the adjusted book value method of calculating the swap ratio this deal is slightly negative for Vijaya Bank shareholders as it is at 21 per cent discount (based on September 30, 2018 abstract balance sheet) while that for Dena Bank it's at a 50 per cent premium. However, on our expected earnings and book values of FY2020, the discount for Vijaya Bank is around 15 per cent," he added. 

Should you buy the merged BoB?

Chokkalingam recommended investors to continue to hold Vijaya Bank as the merged entity, Bank of Baroda will become attractive stock.

Global brokerage Nomura also maintained 'buy' rating on BoB, saying the valuation is undemanding.

"Our pro forma estimates indicate a merged company RoE of +12 per cent by FY21F. The merger will be nearly 4 per cent book-accretive to BOB and nearly 4 per cent earnings-dilutive," the brokerage pointed out in a research note.

"BoB trades at 0.65x Sep-20F book on an adjusted basis, which we believe is undemanding, hence we maintain our Buy rating," Nomura added.

However, the valuation of the merged entity appears expensive to domestic brokerage Elara Capital.

"The total number of shares post-merger comes to 3,425 million while net worth of the combined entity stands at Rs 556 billion. Our calculations show adjusted book value for the merged entity's stands at Rs 80 per share. Thereafter, considering the actual swap ratio and January 2's closing price for BOB, the combined entity is at a valuation of 1.5x, which seems to be richly valued," Elara Capital noted in a research note.

The brokerage estimates the merged entity's loan book to increase by 42 per cent with largely unchanged net NPA and a slight fall in the coverage ratio, from 61.8 per cent to 58.4 per cent. And, the merged entity would undergo equity dilution of merely 29 per cent.

The merger is expected to be completed by April 1, which would give birth to India's third-largest commercial bank with a total business size of Rs 15.4 lakh crore and loan book size of Rs 6.6 lakh crore and branch network of 9,511.