Lord Krishna Bank is asking for over Rs 450 crore (Rs 4.50 billion) as acquisition price from Federal Bank, which is three times its book value of Rs 16.95 per share, sources say. But Federal Bank is not willing to pay such a "high" amount.
"At best, Federal Bank may pay close to two times the book value of LKB shares or around Rs 300 crore (Rs 3 billion). If LKB agrees, it will be part cash, part share swap," they said.
Both the banks are meeting this week for a final round of talks. If they agree on the valuation, boards of the banks will meet in the second week of October to seal the deal.
Federal Bank has not yet appointed any investment banker for the deal, while DSP Merrill Lynch is advising LKB. The two banks will move the Reserve Bank of India once they agree on the deal, which will be the first consolidation move in the old private sector banking industry.
Sources said among the old private banks, Dhanalakshmi Bank could be the next takeover target. Federal Bank has a book value of Rs 110.27 and is trading at over 1.5 times its book value.
On Friday, it closed at Rs 187.50 on the Bombay Stock Exchange. Most of the listed old private sector banks have been trading at around 1.5 times their book value, while shares of new private banks have been trading at three times their book value.
Sources said LKB Director Mohan Puri, who held around 65 per cent stake in the bank, would have about 10 per cent stake in Federal Bank, after merging with LKB.
RBI guidelines on ownership of stakes in private sector banks say that a single entity cannot own more than 10 per cent. ICICI Bank holds around 20 per cent in Federal Bank. It will bring down its stake over a period of time.
The merger of Kochi-based LKB with Aluva-based Federal Bank will create a private sector bank, headquartered in Kerala, with assets over Rs 19,300 crore (Rs 193 billion) on March 31, 2004, which will be about 15 per cent more than Federal Bank's asset size.
In terms of the branch size, Federal Bank will have a net gain of about 40 branches in northern India, particularly in Punjab, where it has just one branch in Ludhiana. The other 72 branches of LKB overlap with the branch network of Federal Bank, largely in Kerala.
The RBI has been in constant dialogue with a few small old private sector banks to consolidate, as they find themselves starved of capital ahead of the implementation of stringent capital adequacy norms under Basel II.
The other banks likely to be the next in line for possible consolidation are Dhanalakshmi Bank, Catholic Syrian Bank and Ganesh Bank of Kurundwad.
