HDFC-HDFC Bank merger: Last lap of merger was the fastest; Chairman Deepak Parekh spent two sleepless nights before the big day

The mega merger between the HDFC twins that took the markets by surprise on Monday was kept a closely guarded secret, with only a handful of people being part of the negotiations. HDFC Chairman Deepak Parekh reinforced that at the press conference to announce the merger: “It was a relief that none of you got any wind of the merger,” he said, tongue firmly in cheek.

 While the dealmakers have been working on the merger for years, the last lap was the fastest, with Parekh saying he spent “two sleepless nights before the big day”.

A dealmaker closely associated with the merger said typically, these deals take time to conclude, but since both entities belonged to the same family, the process took much less time.

The merger will create a behemoth that will place the merged entity among the top 10 most valuable banks globally.

Dealmakers that FF spoke to said with the regulatory arbitrage between banks and non-bank lenders ending, it made sense to close the deal now. Also what made it easier for the merger was the growth in HDFC Bank’s balance sheet, which has enabled it to absorb its parent without much disruption.

The deal has been valued at $40 billion basis the closing stock price of HDFC on Friday, which valued the company at $60 bn. Given that 21% stake of the mortgage major, worth $20 billion, is going to be extinguished in HDFC Bank, the deal value is pegged at $40bn.

While the market has reacted positively to the merger, with stock price of HDFC rising by 9.3% and that of HDFC Bank by 10%, analysts believe that the priority sector lending requirements, along with SLR and CRR requirements, would be a drag on HDFC Bank after the merger.

According to rough calculations by Macquarie, “HDFC Bank will have an excess of SLR/CRR asset requirement of Rs 70,000-80,000 crore and will  also need an incremental Rs 90,000-crore agriculture portfolio (based on 18% of borrowings) to meet priority sector lending norms. These low-yielding portfolios could be a drag on the merged entity’s P&L.”    

The valuers arrived at the valuation using a combination of methods – both qualitative and quantitative. While typical valuation metrics were used to arrive at the fair value of the deal, HDFC Limited’s vintage and dominance in the mortgage space are hard to replicate today.

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