Restructuring @ ICICIReverse Merger of ICICI Limited into ICICI Bank

Agenda

• Unique aspects Bank Valuation Reverse Merger

• ICICI and ICICI Bank Ltd. Corporate Information & History Operative Environment Business Case for Merger Deal Structuring

• Merger Performance Assessment Valuations prior to merger Ratio Analysis Current Valuation

Unique Aspects

Issues in Financial Firm Valuation

• Debt - Raw material or source of capital?• Are savings account deposits to be

treated as debt?• Is interest paid on savings accounts an

operating expense or a financial cost?• Impact of regulation - equity capital and

D/E ratios, reinvestment and retention ratios CAR & Equity Multiplier CRR

Financial Firm Valuation

• Net Capital Expenditure Few Real Fixed Assets Investments for long term growth (human

capital, branding) appears as expense on P&L, not as assets on B/S

• Working Capital Most of assets and liabilities are current Large volatility in working capital

• Too sensitive to macro-economic factors (e.g. interest rates)

Financial Firm Valuation

• Standard DCF can’t be used

• Alternatives Dividend Discount Model Equity Valuations (FCFE) Multipliers & Ratios

P/B Equity Multiplier RoE RoA

Reverse Merger

• A publicly-traded smaller company acquires ownership of a larger company.

• Requires reorganization of capitalization of the acquiring company.

• Often used as an alternative route to IPO Lesser cost Less susceptible to market conditions Tax Carry Forwards from Shell

Agenda

• Unique aspects Bank Valuation Reverse Merger

• ICICI and ICICI Bank Ltd. Corporate Information & History Operative Environment Business Case for Merger Deal Structuring

• Merger Performance Assessment Valuations prior to merger Ratio Analysis Current Valuation

Corporate Information

ICICI Banking Corporation Ltd.

Formed in: 1994

Operations: Retail Banking/ Core

Banking Solutions

Forays: Life Insurance (Prudential PLC. Of UK) General Insurance

(Lombard of France) BPO (OneSource) International presence(ICICI Bank UK, ICICI

Bank Canada & ICICI Bank International)

@ 2001

ICICI Limited

Formed in: 1955

Operations: Provide foreign currency

loans to Indian companies

Forays: Project finance Underwriting Venture Capital Mutual Funds Set up of ICICI Bank …. many more

Source: ICICI Bank website

Operating Environment

• 2000-03 saw process of financial reforms by regulators

• Transformational phase (RBI Guidelines on universal banking)

• New private banks

• CRR reduced to 5.0%

• Higher tax deductions on provision for bad debts

• Incorporation of subsidiaries by foreign banks

• Faster resolution of NPAs

• Significant boost to housing (Risk weight from 100% to 50%)

Changing Environment

Demanding and sophisticated

customersGlobalization

Technological innovation

Shareholder returns

Emergence of integrated universal banks

The Business Case

• Blurring boundaries between financial intermediaries

• Increasing competitive pressures

• Competitive advantages to be gained from concept

of Universal Banking (current environment)

• “Forward leap” in the hierarchy of Indian banks (size

& scale)

External

The Business Case

• Optimization of human and financial capitals• Higher profitability by leveraging on technology

and low cost structure• Greater tax efficiencies• Complete product suite with immense cross-

selling opportunities • Risk diversification• Improved ability to further diversify asset

portfolio and business revenues (de-risking exercise)

• Lower funding costs • Increased fee income opportunities (client base)

Internal

Complimentary activities

ICICI Bank

Strong retail franchise Largest private sector bankTechnology leader among banksICICI Limited

Large capital baseDiversified and de-risked assetsStrong brand Well established corporate relationships

Strong complimentary organizations

Deal Highlights

• Complex and challenging - First Indian Universal Bank

• Involvement of RBI• Effective communications to a wide range of

investors, lenders, rating agencies (critical) – Both companies listed in exchanges within India and US

• Regulations within India (SEBI) & US (SEC)• US GAAP was followed• In first step during October, 2001 both the boards

approved the merger of ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank

• Next, ICICI group’s financing and banking operations, both wholesale and retail, were integrated into a single entity

Deal Structuring

• Post merger, the holding of ICICI Ltd. in ICICI Bank was diluted to 52.6% from 62.6%

• SWAP Ratio – one fully paid-up equity share of ICICI Bank for two fully paid-up equity shares of ICICI

Market Value of both the company 114780.2738

ICICI Ltd.% holding 68.01%

No. of shares of ICICI Ltd. in new company 418482881

SWAP RATIO (For every two shares of ICICI Ltd.) 1.065730793

Premium to ICICI Bank 6.57%

SWAP Ratio - Takeover premium

• Market Price Method

• No Premium to ICICI Ltd.- a discount !!

ICICI Bank Stock *

ICICI Limited Stock *

Exchange Ratio(For two share of ICICI Ltd.)

178.26 106.6 1.1960

* The Market price is averaged to annual value

SWAP Ratio - Current Market Cap Method

ICICI Bank (2000-01)

No. of outstanding shares (Nos) 196818880

Average Price (Rs) 178.26

Market Cap (Rs) 35084933549

ICICI Ltd. (2000-01)

No. of outstanding shares (Nos) 785344448

Average Price (Rs) 106.6

Market Cap (Rs) 83717718157

Total Market Cap (Rs) 118802651705.60

ICICI Ltd.% holding 70.47%

No. of shares of ICICI Ltd. in new company (Nos) 469638271

SWAP RATIO (For every two shares of ICICI Ltd.) 1.1960

Premium to ICICI Bank 19.60%

Agenda

• Unique aspects Bank Valuation Reverse Merger

• ICICI and ICICI Bank Ltd. Corporate Information & History Operative Environment Business Case for Merger

• Merger Performance Assessment Valuations prior to merger Ratio Analysis Current Valuation

Financial Restructuring - Valuations

DIVIDEND DISCOUNT MODEL

ICICI BANK (forecasted in million Rupees, other than per share data)

DDM Valuation 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Dividend Expected per share 2.93 3.80 4.94 6.43 7.71 9.25 11.10 13.33

Dividend Expected 575.70 748.40 972.92 1264.80 1517.76 1821.32 2185.58 2622.69

Terminal Value               84635.48

Total 575.70 748.40 972.92 1264.80 1517.76 1821.32 2185.58 87258.17

Equity Value 36,715.20

Price Per Share 186.54

Dividend Discount Model – Used heavily in banking and financial industry

ICICI Bank

Determining the SWAP Ratio

Two Stage Growth Model(First 4 years assumed growth 30% and then 20% for next 4)

Dividend in 2000-01 2.25

Growth in dividend (First Four Years) 30%

Growth in dividend (Second Four Years) 20%

Beta 0.9311

Risk Free Rate 7%

Cost of equity 0.135177

Terminal Growth Rate 10%

Assumptions

Determining the swap ratio

DIVIDEND DISCOUNT MODEL

ICICI Limited (forecasted in million Rupees, other than per share data)  

Year 2001-02 2002-03 2003-04 2004-05 2005-06

Dividend Expected per share 6.325 7.27375 8.3648125 9.6195344 11.062465

Dividend Expected 4967.3036 5712.3992 6569.2591 7554.6479 8687.8451

Terminal Value         119026.67

Total 4967.3036 5712.3992 6569.2591 7554.6479 127714.52

Equity Value 78,065.08

Price Per Share 99.40

ICICI Limited

Assumptions

ICICI Limited Growth Model Assumptions

Dividend in 2000-01 5.5

Growth in dividend (First Five Years) 15%

Beta 1.269

Risk Free Rate 7%

Cost of equity 0.15883

Growth Rate 8%

Sensitivity Analysis of SWAP Ratio

1.065730793 6% 7% 8% 9% 10% 11% 12%

6% 1.615462866 1.4578645 1.2868234 1.100543 0.8968915 0.673320371 0.42676

7% 1.750400312 1.579638 1.3943101 1.1924698 0.9718076 0.729561919 0.4624

8% 1.919572807 1.7323067 1.5290672 1.3077195 1.0657308 0.800072538 0.50709

9% 2.137901919 1.9293364 1.7029808 1.4564574 1.1869453 0.891071497 0.56477

10% 2.430454764 2.193349 1.9360186 1.6557607 1.3493682 1.013006698 0.64205

11% 2.842832653 2.5654969 2.2645049 1.9366954 1.5783169 1.184884641 0.75099

12% 3.467612237 3.1293253 2.7621834 2.3623299 1.9251894 1.445291011 0.91604

13% 4.525815048 4.084294 3.6051122 3.0832364 2.5126947 1.886346961 1.19558

14% 6.707971987 6.0535681 5.343345 4.5698428 3.72421 2.795863826 1.77204

15% 13.83272675 12.483259 11.018685 9.4236212 7.6798144 5.765441538 3.65419

1.3943101

1.1924698

0.9718076

1.5290672

1.3077195

1.0657308

1.7029808

1.4564574

1.1869453

1.9360186

1.6557607

1.3493682

Range of SWAP ratio

Performance Analysis

Growth(Rs. in 000's) 1999-00 2000-01 Assumptions 2002-03 2003-04 2004-05 2005-06 2006-07IncomeInterest Earned 8434000 12421316 47.28% 18293703 26942360 39679816 58439120 86067201Other Income 1953000 2203402 12.82% 2485909 2804637 3164231 3569930 4027645Total 10387000 14624718 40.80% 20779612 29746998 42844048 62009050 90094846ExpenditureInterest Expended (%of interest earned) 6656000 8376723 67.44% 12336960 18169467 26759389 39410343 58042248Operating Expenses (%of interest expenses) 1459000 3346264 22.88% 4754558 6806374 9803095 14188216 20614493Operating Profit 2272000 2901731 3688094 4771156 6281564 8410492 11438106Provision and Contigencies 1222000 1290757 8.83% 1833979 2625428 3781355 5472831 7951644Net Profit/Loss 1050000 1610974 53.43% 1854115 2145728 2500209 2937660 3486462

ICICI Bank Revenue and Profit ForecastHistorical Forecasted

Performance Analysis

Particulars 2003-04 2004-05 2005-06 2006-07

(Rs. in 000's)Projected Actual

Projected Actual

Projected Actual

Projected Actual

Total Operating income

49782120

44735000

66164448

58264000

89433685

75761000

122680013

102806000

Net Profit161031

14163710

00180771

24200520

00205024

16254010

002350807

83110000

0

Projected Operating Income is less than the Actual operating income achieved

Projected Net profit is lower than actual profit

This is attributed to operating efficiency that the reverse merger could bring in.

Ratio Analysis

2002 2001 2000Total Assets 1068207167 197365903 130416000Net Worth 66720000 13126180 11387000Operating Income 5472338 2901731 2272000PAT 2593559 1610974 1050000No. of shares outstanding 612997.3475 196818.88 196818.88

Income margin 47.39% 55.52% 46.21%

Book value 108.84 66.69 57.86

ROA% 0.243% 0.816% 0.805%RONW% 3.887% 12.273% 9.221%

ICICI Bank -Pre merger

2003 2004 2005Total Assets 1068120000 1252288741 1676594053Net Worth 69330000 78450000 125500000Operating Income 25710000 23720000 29560000PAT 12060000 16370000 20050000No. of shares outstanding 612997.3475 612997.3475 616391.9

Income margin 46.91% 69.01% 67.83%ROA% 1.13% 1.31% 1.20%RONW% 17.40% 20.87% 15.98%Book Value 113.10 127.98 203.60

ICICI Bank- Post-Merger

Discount rate

Risk free rate

7%

Equity risk premium

7%

Beta 0.96*

Ke 13.72%

*Beta from OLS Regression on monthly share prices

Growth Rate Assumptions

• Historical Retention Ratio - 35%• Historical Dividend Growth Rate - 18%• Short Term Income Growth Rate same

as Historical Dividend Growth rate of 18%

• Long Term Growth rate same as Economic growth rate of 9%

DDM Valuation

FCFE Valuation

Residual Earnings Valuation

Post Merger Performance

Profitability ratios 2007 2006 2005 2004 2003Operating margin (%) 13.33 18.66 22.63 18.12 7.57Gross profit margin (%) 11.41 15.10 17.64 13.44 3.23Net profit margin (%) 10.81 14.12 16.32 13.67 9.86Adjusted cash margin (%) 12.30 17.55 21.14 18.20 14.05Adjusted return on net worth (%) 12.31 11.40 15.99 20.47 17.49Reported return on net worth (%) 12.79 11.43 15.97 20.43 17.39Return on long term funds (%) 82.46 56.24 70.54 106.69 119.87

References

• “A Critical Look Into The Evolution Of An Indian Universal Bank” – Arindam Gupta, Debashis Kundu

•  • Various Annual Reports of the company present within the

URL http://www.icicibank.com/Pfsuser/aboutus/investorelations/investorelation.htm

•  • Investor Presentations and Merger Presentations of ICICI

(Source: ICICI Website)

•  ICICI and ICICI Bank Merger – A KRC Analysis