MOSL: BANK OF BARODA (Buy)-Share swap ratios announced for merger with Dena, Vijaya Bank

Bank of Baroda: Share swap ratios announced for merger with Dena, Vijaya Bank; Deal favorable for BOB shareholders

(BOB IN, Mkt Cap USD4.4b, CMP INR119, TP INR140, 17% Upside, Buy)

• Bank of Baroda's (BOB) board has approved the merger with Dena Bank and Vijaya Bank with the following share swap ratios: (a) 402 equity shares of BOB for every 1,000 equity shares of Vijaya Bank and (b) 110 equity shares of BOB for every 1,000 equity shares of Dena Bank.
• We believe that the share swap ratios are favorable to BOB shareholders and imply a discount of ~27% to Dena Bank and ~6% to Vijaya Bank based on the closing price of 2nd Jan'19. Based on the price on the day of the merger announcement, the proposed swap ratios imply a discount of ~30%/~11% to Dena Bank/Vijaya Bank. The merger will now lead to the creation of the third largest lender in India, with an advances and deposits market share of 6.9% and 7.4%, respectively.
• While the process of merging multiple entities will present its own set of challenges in the near term, BOB stands to benefit over the long term, in our view. We will look to revise our estimates on attaining more clarity on the growth and earnings trajectory. We maintain our Buy rating with an unchanged target price of INR140 (1x Sep-20E ABV).

Share swap ratios imply 27%/6% discount to Dena/Vijaya Bank

• The swap ratio of 402 and 110 equity shares of BOB for every 1,000 shares of Vijaya Bank and Dena Bank, respectively, are favorable to BOB’s shareholders, in our view. The swap ratios imply a discount of ~27% to Dena Bank and ~6% to Vijaya Bank, based on the closing price of 2^nd Jan’18. Based on the price on the day of the merger announcement, the proposed swap ratios imply a discount of 30%/11% to Dena Bank/Vijaya Bank. While the swap ratio appears fair in respect to Dena Bank owing to the multiple challenges faced by the bank, we believe Vijaya Bank shareholders have nothing to gain from this merger.