IDFC Ltd and IDFCB managements can accelerate the merger process if they both agree on the coming improved performance of the bank in FY 23 and FY 24, at the start of the discussions. That would shorten the discussion and avoid unnecessary negotiations. A quick agreement would be in the interest of both the parties. Since it is going to become one merged undistinguishable entity, the benefit will accrue to all equally. It is a win win situation and requires a win win approach.
For IDFC Ltd it is even more important to dock with IDFCB and transfer all its force, goodwill and resources to the bank at the earliest. The bank is the available super engine to push those resources also in the process, for generating shareholder value for all.
If post tax they recieve Rs 4,000cr then that means cash of Rs 26 per share, that will provide significant valuation comfort. Means bank stake is only valued at Rs 18 a share today.
This is untrue. please study more. all share of IDFC will convert to IDFC bank shares + one would get a large dividend with the AMC cash (which one can use to buy bank shares)
You are getting 1.6 shares of bank in each share of idfc.
IDFC owns 36% of IDFC First. That is not the same thing as it gives 36% exposure to IDFC First.
~50-60% upside is there if the bank doesnāt do anything and doesnāt go up in value.
So whenever one invests in an instrument (IDFC Limited in this case) which is essentially an underlying driven company (in this IDFC First Bank being underlying), the price of the instrument is primarily driven by the price of the underlying because there is no way the underlying will be sold.
However, this case is different as IDFC Limited has concluded the transaction and has (or rather will have in the coming quarters) 25/share as cash from the MF business sale. So hypothetically even if IDFC First Bank were to fall to its Covid low price of say around 20 bucks per share, IDFC Limitedās worst-case valuation would still be something like 25 Rs (1.25 shares of IDFC First Bank instead of 1.4 shares of IDFC First Bank) and 25 Rs as dividend less some tax on the dividend (however as we saw in case of Majesco because there are entities like Mutual funds who donāt have to pay a dividend related tax and the tax amount is not fully wasted). So IDFC Limited at 45 bucks is actually trading at its worst-case valuation.
So the dice seem to be loaded in favor of IDFC Limited investors at the current price. How much returns are going to be made will be dependent on how much IDFC FB will perform or not perform. One can also short IDFC FB in the futures lot to arbitrage the same.
Disclosure - Invested for self and clients for multiple years from lower levels. I run a SEBI registered PMS. Views are personal.
I am new to investing. here is my calculation for number of shares we will get corresponding to each IDFC limited share. kindly suggest if there is some misunderstanding in my calculation.
IDFC first bank market cap = 19712 cr.
price of each IDFC First bank share = 31.6 rs
Total number of outstanding shares = 19712 Cr/ 31.6 = 623.797 Cr
IDFC Limited Market cap = 7120 Cr
Price of each IDFC limited share = 44.7 rs
Total number of outstanding shares = 7120 Cr/ 44.7 = 159.284 Cr
IDFC limited holds around 36.6 percent stake in IDFC First bank.
which implies IDFC limited holds around 623.797 Cr x 0.366 = 228.309 Cr shares of IDFC First bank.
As a IDFC limited shareholder, corresponding to each share that we hold, we will get around
228.309 Cr / 159.284 Cr = 1.433 shares of IDFC First bank.
Kindly comment whether the above calculation makes sense to you people.
Theoretically yes, but the final swap ratio will be decided as a negotiated outcome between the two companies. However, it is not expected to be very different from this number but most likely would be a bit lower.
Additional shares will be issued for the 4,000cr recieved from the sale of the AMC. I expect the final swap ratio will be closer to 1.90-2.00x after factoring in a small discount.
Yes, it should be either cash dividend + lower swap ratio of ~1.4 OR a higher ratio ~1.9x
Second option is better as it eliminates the tax outflow on dividend. The company can use the cash for growth capital given the guidance of 20% advances growth.
Your calculations are off, Rs 4,000cr divided by a price of Rs 32 odd means an additional 125cr shares will need to be issued. There are 160cr shares outstanding in IDFC so that means each IDFC shareholders gets an additional 0.78 shares. So 1.42 + 0.78 equals 2.20 shares of IDFCB for each IDFC share. Assume a reverse merger discount of 10% and you get 2 IDFCB shares per IDFC share.
Whatever calculations one may use to arrive at the swap ratio, it may be pertinent to note that IDFC First will be very very loath to issue fresh shares.
Thatās because less than 15 months ago, in April 2021, it issued fresh shares at Rs 57.35/share raising Rs 3,000 crores from investors. Issuing fresh shares at todayās price of ~ Rs 32/share is a whopping 45% discount thus infuriating institutional investors.
Fresh issue might be difficult.
Any Fresh issue might be difficult.
Any views if the company goes for buy back?
Suppose if idfc ltd goes for buyback of their shares at 80rs
For 4k crores then can buy back 50 cr shares
Now total equity is 110crs
Idfc ltd has 204crs assuming 10%discount of merger it will be 1.85shares of idfc bank
if the company goes for buy back
The company (IDFC Ltd.) can go for a buyback with the cash received from sale of the AMC business. The buyback rules will put an upper cap on the total amount that can be bought back. Not more than 25% of capital + free reserves can be used for the buyback. So not all cash for the AMC sale can be returned. Of course there would be a buy back tax the company will have to pay (a complicated calculation), that would also drain out some of the AMC sale proceeds. But the amount will be tax free in the investor who gives the shares to be bought back.
IDFC Ltd holds 36% in IDFC First Bank.
That DOES NOT mean that IDFC Ltd has 36% of its value in IDFC First Bank. In fact IDFC Ltd has pretty much 100% of its value in IDFC First Bank, plus the 4500cr odd cash.
So in your scenario 2, when bank doubles, then value of IDFC Ltd shareholding in bank also doubles. And they still have the excess cash.
When the merger does happen, the cash is the arbitrage as IDFC Ltdās present mcap is almost equal to its present value of holding in IDFC First.
Your premise that a Rs. 100 investment in IDFC entails 36% of IDFC First is what is incorrect. At current prices, an investment in IDFC share gives you 1.4 shares of IDFC First anyway just through its shareholding in IDFC First. Itās already at parity here in terms of the just the shareholding bit. If the underlying Bank shares double, so does IDFCās value in the bankās holding. The added bonus here is just that depending on whether or not IDFC First wants to dilute at these levels for the 3500-4000 cr of AMC funds, IDFC shareholders will get a special dividend out of those funds or more shares of IDFC First depending on where itās trading at when the reverse merger is completed.
@8sarveshg bhai, Going by the other 2 cases - Ujjivan and Equitas whr the merger ratios have been announced, can we make a ballpark guess as to what the negotiated ratio will be in case of IDFC - IDFC First?
And is thr any binding that sale proceeds of AMC have to be distributed before the merger? I mean canāt IDFC use that net cash position to negotiate a better merger ratio for its shareholders? Its going to be almost 20-25% of the bankās net worth
