In a first of its kind deal by an Indian bank, Axis Bank today acquired the investment banking, equity distribution and advisory divisions of one of India's leading financial services firm, Enam Securities Ltd, in an all stock deal valued at Rs 2,064 crore.
In a joint press conference in Mumbai, Axis Bank Managing Director and Chief Executive Shikha Sharma and Enam’s Chairman Vallabh Bansali announced the deal in an exchange ratio of 5.7 shares of Axis Bank for every one share of Enam Securities. As a result, Enam will get 3.3% stake in the enlarged entity.
According to the contours of the deal, Enam Securities will demerge its investment banking, institutional equities, retail equities and related businesses such as distribution of financial products, and NBFC, to a wholly owned subsidiary of Axis Bank. Axis Bank will also demerge its investment Banking business into the wholly owned subsidiary.
Financial Powerhouse
The transaction would create one of India’s leading financial services powerhouses combining the investment banking and equities franchise of Enam Securities with the dominant debt capital markets and commercial banking franchise of Axis Bank. Enam and Axis Bank shall continue their respective “buy side” and investment management businesses separately. These do not form part of this transaction.
The Board of Axis Bank will induct Vallabh Bhansali, the Co-founder and Chairman of Enam, as an independent director, subject to approval from Axis Bank’s shareholders and the RBI. Enam’s Manish Chokhani would be the MD & CEO of the new entity while Jagdish Master will continue to provide guidance as a board member of the wholly owned subsidiary.
Enam will continue to hold the AMC division and insurance and they can start mutual fund business to compete, Shikha Sharma told reporters in Mumbai. Axis Bank will use Enam brand for two years and there will be a non-compete agreement on the merged business for next five years, Sharma said. The deal is neutral for Axis’s capital adequacy and this merger is not EPS dilutive, she said.
As a part of the deal, 400 employees of Enam will move to Axis bank and Enam will transfer net current assets worth Rs 300 crore. The acquisition is subject to approvals from shareholders and Reserve Bank of India (RBI), SEBI and the High Courts of Gujarat and Mumbai.
According to Bhansali of Enam, this could hardly be called as an acquisition. “The entire management of Enam is migrating to Axis,” he said. It will take 4-6 months’ time to complete the deal, he added. The profit before tax for the Enam Unit was Rs 92 crore during FY10 and in a period from April 1 to October 20 this year, the total revenue stood at Rs 182 crore with a PBT of Rs 77 crore.
Synergies
According to some sector observers, Enam deal will make Axis Bank a strong force in the field of corporate finance and investment banking but the question that will be asked by many is whether Axis has done the right thing instead of building its own team and business with some heavy-duty head hunting.
Dinesh Thakkar, Managing Director, Angel Broking. told VCCircle: "It’s a deal that benefits both parties. There are synergies that will complement each other. The deal will help Enam strengthen its position in investment banking. Axis Bank lacks expertise in institutional broking and investment banking and they were low on the league tables. Two different mindsets are needed for banking and broking. Now with all the talent coming in, Axis can strengthen its base."
In terms of valuation, It’s a win-win situation for both, Thakkar said. "This can be considered as a fair valuation for both parties," he added.
Others who have sewn similar deals have done reasonably well, such as IDFC that acquired SSKI. The argument would be that it would have taken Axis Bank much longer to ramp up a business with similar human capital besides a running business.
Valuations
With the deal valued at over Rs 2,000 crore, Axis has paid more than 20 times net profit of Enam which doesn’t appear cheap. But Axis Bank would now be competing more closely with bigger rivals in the financial sector such as ICICI Bank.
The valuation also appears closely matched up with another securities firm Edelweiss Capital. Although not strictly comparable, Edelweiss, that had almost three times the profit last fiscal. is trading around 19 times its last year’s net earnings.
For Enam promoters, it could be seen as a sweeter deal than those offered by other foreign suitors. It also gives them a bigger platform in which to play rather than operating out of a boutique unit that had become big but could have faced problems in moving to the bigger league with foreign I-banks spreading their operations in the country.
The strategic objective behind the deal is to create a complete bouquet of financial products and services for corporate, institutional and individual clients that will enhance the ability of the combined entity to serve client needs in a seamless manner across product categories and geographies.
With Axis Bank’s distribution platform of almost 1,100 branches and Enam’s retail network, it is expected that the combined entity will have an opportunity to build a dominant retail franchise as well. “We are delighted at the prospect of combining forces with Enam Securities, a pre-eminent name in investment banking and advisory field, to create an Indian financial services powerhouse at a time when India has occupied the world’s centre-stage and is poised for years of rapid growth,” Sharma said.
