HDFC Bank acquires Centurion for $2.4 billion

The all-share takeover of Centurion Bank of Punjab creates IndiaÆs second largest bank by number of branches, but the share-swap ratio disappoints shareholders.
HDFC Bank has acquired Centurion Bank of Punjab for Rs95 billion ($2.38 billion) creating IndiaÆs second largest bank measured in terms of number of branches.

The merger is an all-share deal with shareholders of Centurion being offered one HDFC Bank share for every 29 shares they hold in Centurion. The share swap ratio was announced yesterday after both parties confirmed the deal over the weekend. The ratio is subject to due diligence and the deal is subject to approval from the Reserve Bank of India and other relevant regulatory authorities and shareholders.

HDFC Bank also clarified that it would consider a preferential offer to its controlling shareholder, Housing Development Finance Corporation (HDFC), to enable HDFC to maintain its shareholding in HDFC Bank post-merger at the 23% level at which it currently stands.

HDFC Bank is India's third-largest lender by market capitalisation after State Bank of India and ICICI Bank and is consistently rated as IndiaÆs best-managed bank. HDFC Bank currently has 754 branches and after acquiring Centurion Bank of Punjab the combined entity will have 1,148 branches, compared with ICICIÆs 955. However, on various balance sheet parameters, HDFC Bank will still be smaller than ICICI Bank and indeed, will still not figure among the top five Indian banks.

Both banks have been involved in mergers before so analysts expect post-merger integration to proceed smoothly.

HDFC Bank acquired Times Bank, founded by the owners of IndiaÆs most widely read English newspaper (Times of India), in 2000. Centurion is a bailout story as it was acquired by private equity firm Sabre Capital in early 2003. At the time it was loss-making due to a number of poor operating decisions and also had a large non-performing loan portfolio. Sabre Capital turned Centurion around and used the bank as a vehicle to acquire Bank of Punjab in 2005 and Lord Krishna Bank in 2006.

Sabre CapitalÆs chairman, Rana Talwar, was formerly group chief executive of Standard Chartered and has also worked with Citi. Indeed, chemistry between a number of key members of the decision-making teams at HDFC Bank and Centurion is credited for bringing this deal to fruition, with past working experience at Citi being one of the commonalities they share. HDFC Bank is advised by JM Financial Consultants and Centurion is advised by Ambit Corporate Finance. However, banking sources comment the deal was largely transacted on a principal-to-principal basis given the background. Coincidentally, Citi is also the largest shareholder in HDFC with a 12% stake.

Centurion BankÆs latest Bombay Stock Exchange filing shows that Bank Muscat owns 14% and Sabre Capital 3.74% of the bank. Rana Talwar, who is also chairman of Centurion, and CEO Shailendra Bhandari are expected to be invited to join the board of directors of HDFC Bank.

HDFC Bank is consolidating its position in advance of 2009 when India has committed to the World Trade Organisation (WTO) that it will open up its banking sector to foreign players. India is currently in the first WTO agreed phase whereby foreign portfolio investment in Indian banks is allowed up to 74% and eligible foreign banks are allowed to acquire banks which are being restructured.

A spate of mergers and acquisitions is expected in the banking sector once it opens up to foreign entities. But some specialists are sceptical that India will honour its agreement next year because the country's state-owned banks are largely still under-performing. Thus there is some speculation that India will try to negotiate a time extension to its 2009 commitment.

HDFC Bank closed trading at Rs1,475 on Friday, February 22, the day before the confirmation that a deal had been struck. Centurion shares which have a face value of Rs1 traded at Rs56 on Friday.

CenturionÆs share price dropped 14.5% to Rs48 at the close of trading yesterday as shareholders were expecting a more generous swap ratio based on the relative prices at which both traded. HDFC BankÆs share price also dropped 3.5% to close at Rs1,423.

HDFC, which had surprised analysts by falling in early trading, recovered and closed about half a percent up at Rs2,587. The Sensex closed up 1.75% at 17,651 points.
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