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Axis Bank (AXSB IN, INR 1,469, Buy)
n Event
Axis Bank and Enam Securities (Enam) have decided to merge their Investment Banking and Equities businesses. The deal size stands close to INR 20.6 bn.
n Brief contours of the deal
Axis Bank will set up a wholly owned subsidiary to which Enam Securities will demerge its investment banking, institutional equities, retail equities and financial product distribution (NBFC) businesses. The bank will demerge its investment banking business into the subsidiary. Swap ratio announced is 5.7 Axis Bank shares for one share held in Enam, implying 3.3% equity stake of Axis Bank (on expanded capital).
n What is in it for Axis Bank
Strategic objective is to harp upon synergies between the two entities across products, relationships and geographies. While on the institutional side, Enam’s investment banking and equity franchise will complement the bank’s strengths in debt capital market, project finance and commercial banking franchise, on the retail front Axis Bank’s distribution platform (1,100 branches) will complement Enam’s retail network. Axis Bank will get the right to use the Enam brand for two years; further, the deal also carries the non-compete clause for (target) businesses for a period of five years.
n Our view : Value accretive
Near term impact of the merger on Axis Bank’s FY11E book value, given the dilution, will be 1.9%. Impact on earnings will be minuscule—dilution of 0.5%. The deal values Enam’s target businesses at around 20x FY11E earnings, a ~25% premium to comparables like Motilal Oswal, among others. However, given the strategic buyout coupled with value accretion expected, given the strong synergies between the two outfits, we believe the premium is well justified. We believe the merger to be value accretive for Axis Bank in the medium to long term as it is a step in the right direction to create a strong Indian financial services powerhouse. With its strong expertise in corporate banking, specifically the infra space, the merger will enable the bank to offer a complete bouquet of financial products and services. The stock currently trades at 2.8x FY12E adjusted book. We maintain 'BUY' recommendation
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