Analysts question Equitas share swap ratio

Last week, the board of directors of Equitas Holdings Ltd and Equitas Small Finance Bank (SFB) had approved the merger of the two companies. It was to be a unique merger since the holding company would merge into its subsidiary and then the holding company would be dissolved.

While the approval of shareholders, stock exchanges, regulators and the NCLT is still under process, there is a new twist to the swap ratio being fixed.

Not surprisingly, a few analysts have seriously questioned the share-swap ratio for the merger between Equitas Small Finance Bank and Equitas Holdings.

The perception is that the swap ratio inordinately benefits shareholders of the smaller promoter company, which is Equitas Holdings, despite having much smaller asset base and a lower market cap. Normally, holding companies trade at a discount to operating companies.

Here is the catch. The merger proposes involves allotting 231 shares of Equitas Small Finance Bank for every 100 shares of Equitas Holdings, which happens to be the promoter company.

Once the merger is completed, Equitas Holdings will be dissolved and subsequently the entire shareholding of Equitas Small Finance Bank will be publicly held. There will be no promoter group with predominantly ownership by MFs and FPIs.

It is this swap ratio that most analysts have an objection to. Their contention is that Equitas Small Finance Bank scores on most counts. For instance, market cap of Equitas Small Finance Bank stands at Rs.6,404 crore compared to market cap of Rs.3,644 crore for Equitas Holdings.
 

The view is that despite Equitas Holdings being the owner, there was a huge cap between their existing market valuations and the implied swap ratios.

Analysts have offered more justification for their stance. Equitas SFB is also larger than Equitas Holdings on other parameters. For example, Equitas Holdings had total assets of Rs.1,793 crore, revenues of Rs.10.30 crore and net worth of Rs.1,789 crore.

On the other hand, Equitas SFB had total assets of Rs.25,261 crore, revenues of Rs.2,564 crore and net worth of Rs.3,583 crore. In short, Equitas SFB scored better on all parameters.

The swap ratio is based on the valuation report submitted by Raghuraman Krishna Iyer, a registered valuer. While JM Financial provided fairness opinion, V Sankar Aiyar & Co.  has certified that the accounting treatment in the scheme conformed to the applicable accounting standards.

The objections from the analysts is based on the premise that even if you consider holding company discount, the swap ratio does not reflect relative strengths.

Equitas Holding is an RBI registered, systemically important core investment company. Its operations are limited to investing in and providing loans to group companies. It has 2 subsidiaries; Equitas SFB and Equitas Technologies.

Equitas SFB is engaged in retail banking with accent on microfinance, CV finance, home finance, loan-against-property and corporate finance. It offers financing solutions for individuals and also for MSMEs.

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