HSBC will buy a 43.85% stake from E*Trade Mauritius, a wholly owned subsidiary of E*Trade Financial, and 29.36% from IL&FS. Both purchases have been priced at Rs200 per share. IL&FS will also get Rs820.1 million as part of a three-year non-compete agreement. The total consideration paid by HSBC is Rs10.1 billion.
The deal was transacted at 1.9 times book value. HSBCÆs India CEO Naina Lal Kidwai highlighted that the multiple HSBC has paid is lower than other recent India deals for brokerage businesses namely Standard CharteredÆs acquisition of 49% of UTI Securities and BNP ParibasÆ purchase of a stake in Geojit Financial.
In compliance with rules made by SEBI, the Indian securities watchdog, HSBC will also make an open offer to acquire up to 20% of the shares held by minority shareholders at a price which has not yet been announced. HSBC did not clarify whether it will delist Investsmart if, after the open offer, the free float falls below the 10% minimum level stipulated by Indian exchanges.
On April 11 Investsmart informed stock exchanges that a major shareholder was considering selling all or part of its shareholding and the deal was being discussed in consultation with Investsmart. That news sent its share price up but more precise details of price and timing seem to have leaked to the market as the shares moved up 20% in the period from May 9 to May 16, rising from Rs164 to Rs199.
Investsmart is listed on the National Stock Exchange and the Bombay Stock Exchange and its global depository shares (GDRs) are listed on the Luxembourg Stock Exchange. It provides investment products to retail and institutional clients including equity and commodity broking, investment banking, insurance broking and distribution, mutual funds distribution and related financing services. The firm has 2,000 employees servicing 138,000 customers in India, through a network of 88 branches and 190 franchisee outlets across 133 cities.
ôThe acquisition is consistent with HSBCÆs stated strategy of investing primarily in faster growing emerging markets and India represents a high priority market for us,ö says Sandy Flockhart, CEO of HSBC Asia-Pacific. ôThis investment is of strategic importance to HSBC as it gives us a foothold in one of the largest retail broking markets in the world.ö
E*Trade acquired a 28% stake in Investsmart in 2006 through the conversion of GDRs it held and then made a mandatory offer to minority shareholders at Rs210 per share. E*Trade said the sale is part of its plan to monetise non-core assets and will yield it $145 million, resulting in a pre-tax gain of between $20 and $30 million.
The agreement and open offer are subject to regulatory approvals. HSBC may also have to offload Investsmart's commodities business as ownership by foreign investors in this sector is restricted in India.