HDFC chairman Deepak Parekh said shareholders of HDFC will get 42 shares of HDFC Bank for every 25 shares held. HDFC’s 26% stake in HDFC Bank will be extinguished as per the terms of the merger. HDFC Bank will be 100% owned by public shareholders, with existing shareholders of HDFC Ltd owning 41%.
According to Refinitiv data, it will mark the largest banking sector M&A globally since April 2007. S&P Global Ratings said the deal would create an entity twice the size of ICICI Bank.
“Change is inevitable, but is welcome when it is beneficial to all the stakeholders. The merger not only makes the combined entity strong enough to counter competition but makes the mortgage offering more competitive,” said Parekh.
Over the years, HDFC Bank has outgrown its parent both in terms of valuation as well as asset size. “The proposed merger will benefit the economy in many ways. A larger balance sheet and a larger capital base will allow a greater flow of credit into the economy,” said Parekh.
“The biggest motivation for the deal is creating demand in the housing market as our penetration in this segment is very low,” said HDFC Bank CEO Sashidhar Jagdishan. “The value of HDFC Ltd is $60 billion. If you strip off the portion of their holding in us, it comes to $40 billion and that’s the value of the deal.”
HDFC Bank shares closed 10% higher, valuing it at Rs 9.2 lakh crore. HDFC rose 9.3%, giving it a market cap at Rs 4.8 lakh crore. The combined entity could become India’s second most valuable company.
Foreign investment may rise
HDFC Bank CEO Sashidhar Jagdishan said, “We have added 730 branches this year. With this announcement, we may ramp it up further because that not only helps us mobilise deposits but also to increase the distribution of affordable home loans. The moment we unleash that, you cannot stop the growth engine.”
The proposed transaction will involve HDFC Investments and HDFC Holdings merging with the parent mortgage company. Subsequently, HDFC will merge with its banking arm, resulting in all the group companies becoming direct subsidiaries of HDFC Bank. Besides the bank, HDFC is the holding company for HDFC Life, HDFC General Insurance, HDFC Mutual Fund, HDFC Credila and HDFC Venture Capital.
The amalgamation will give foreign investors more headroom to invest in HDFC Bank, where foreign holding was close to the limit. Extinguishing HDFC’s holding would also result in a considerable increase in the earning per share of the bank.
As a result of the mega merger announcment, shares of both HDFC and HDFC Bank rose on the stock exchange. Shares of HDFC closed 10% higher valuing the private lender at Rs 9.2 lakh crore while shares of the housing finance company rose 9.3% giving it a valuation of Rs 4.9 lakh crore.
There was speculation about a merger between the two entities for over two decades, particularly after ICICI merged with ICICI Bank in 2001. The HDFC merger was finalised less than 18 months after its founding CEO Aditya Puri retired and Jagdishan stepped into his shoes.