IDFC First Bank Shares Drop, IDFC Gains Post-merger

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IDFC First Bank shares Plunge, IDFC Limited Surges

IDFC First Bank shares witnessed a significant drop of nearly 6% in Tuesday’s trade, while IDFC Limited experienced a gain of over 6%. This market movement follows the announcement of the swap ratio for the proposed merger between these two entities. The swap ratio is deemed to be in favor of IDFC shareholders.

Swap Ratio for IDFC Merger with IDFC First Bank

The share exchange ratio for the amalgamation of IDFC with IDFC First Bank has been set at 155 equity shares of face value Rs 10 of IDFC First Bank for every 100 equity shares of face value Rs 10 of IDFC Limited.

Favorable Swap Ratio for IDFC Limited

The swap ratio strongly favors IDFC Limited, according to Nuvama, as it equates to 1.55. Nuvama Alternative had anticipated a worst-case scenario swap ratio of 1.40 and a best-case scenario ratio of 1.60.

Market Reaction: IDFC First Bank and IDFC Limited Shares

IDFC First Bank’s shares took a steep nosedive, plummeting by 5.9% to reach a low of Rs 77.10 on the Bombay Stock Exchange (BSE). Conversely, IDFC Limited observed a surge in its shares by 6.04%, reaching a high of Rs 115.70 during early trading hours. However, the gains were later trimmed to 0.46%, settling at Rs 109.60 per share. Following the merger announcement, CLSA has maintained an underweight stance on IDFC First Bank, setting a target of Rs 85.

Expectations and Insights

Nuvama noted that the market spread is expected to narrow significantly upon the opening of trading on Wednesday. Therefore, they recommend considering a spread trade only when the spread reaches adequate levels based on the merger closure timeline. However, Nuvama believes that the likelihood of such levels, around 13-14%, is low.

Merger Impact and Historical Precedents

The IDFC-IDFC First Bank merger news arrives shortly after the merger of Housing Development Finance Corp Ltd and HDFC Bank in a historic $40-billion deal, the largest in India’s corporate history.

The completion of the merger is projected to take approximately 12 to 15 months. Nuvama cites two recent BFSI mergers as examples, noting that the merger formalities for the HDFC twins took 15 months to complete, while the merger between Shriram Transport Finance Company and Shriram City Union Finance was concluded in 12 months.

In conclusion, the announcement of the merger between IDFC and IDFC First Bank has triggered a significant market reaction, with IDFC First Bank’s shares plunging while IDFC Limited’s shares surged. The swap ratio strongly favors IDFC Limited shareholders, leading to divergent market movements. Market analysts have shared their insights and recommendations based on these developments, while also drawing comparisons to recent mergers in the BFSI sector. The completion of the merger is expected to occur within the next 12 to 15 months, following the completion of necessary formalities.