1. Reverse Merger of ICICI Limited into ICICI Bank
ICICI
Reverse Merger of ICICI Limited into ICICI Bank

2. Agenda Unique aspects ICICI and ICICI Bank Ltd.
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

3. Unique Aspects

4. 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

5. 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)

6. Financial Firm Valuation
Standard DCF can’t be used
Alternatives
Dividend Discount Model
Equity Valuations (FCFE)
Multipliers & Ratios
P/B
Equity Multiplier
RoE
RoA

7. 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

8. Agenda Unique aspects ICICI and ICICI Bank Ltd.
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

9. Corporate Information
@ 2001
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)
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

10. Operating Environment
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%)

11. Demanding and sophisticated customers
Changing Environment
Demanding and sophisticated customers
Globalization
Emergence of integrated universal banks
Shareholder returns
Technological innovation

12. The Business Case Blurring boundaries between financial intermediaries
External
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)

13. The Business Case Optimization of human and financial capitals
Internal
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)

14. Complimentary activities
Strong complimentary organizations
ICICI Bank
Strong retail franchise
Largest private sector bank
Technology leader among banks
ICICI Limited
Large capital base
Diversified and de-risked assets
Strong brand
Well established corporate relationships

15. 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

16. 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
ICICI Ltd.% holding
68.01%
No. of shares of ICICI Ltd. in new company
SWAP RATIO (For every two shares of ICICI Ltd.)
Premium to ICICI Bank
6.57%

17. 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

18. SWAP Ratio - Current Market Cap Method
ICICI Bank ( )
No. of outstanding shares (Nos)
Average Price (Rs)
178.26
Market Cap (Rs)
ICICI Ltd. ( )
106.6
Total Market Cap (Rs)
ICICI Ltd.% holding
70.47%
No. of shares of ICICI Ltd. in new company (Nos)
SWAP RATIO (For every two shares of ICICI Ltd.)
1.1960
Premium to ICICI Bank
19.60%

19. Agenda Unique aspects ICICI and ICICI Bank Ltd.
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

20. Financial Restructuring - Valuations
Determining the SWAP Ratio
Dividend Discount Model – Used heavily in banking and financial industry
ICICI Bank
DIVIDEND DISCOUNT MODEL
ICICI BANK (forecasted in million Rupees, other than per share data)
DDM Valuation
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
Terminal Value
Total
Equity Value
36,715.20
Price Per Share
186.54
Two Stage Growth Model(First 4 years assumed growth 30% and then 20% for next 4)
Dividend in
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
Terminal Growth Rate
10%
Assumptions

21. Determining the swap ratio
ICICI Limited
DIVIDEND DISCOUNT MODEL
ICICI Limited (forecasted in million Rupees, other than per share data)
Year
Dividend Expected per share
6.325
Dividend Expected
Terminal Value
Total
Equity Value
78,065.08
Price Per Share
99.40
ICICI Limited Growth Model Assumptions
Dividend in
5.5
Growth in dividend (First Five Years)
15%
Beta
1.269
Risk Free Rate 7%
Cost of equity
Growth Rate 8%
Assumptions

22. Sensitivity Analysis of SWAP Ratio 6% 7% 8% 9%
10%
11%
12%
0.4624
13%
14%
15%
Range of SWAP ratio

23. Performance Analysis

24. Performance Analysis
Particulars
(Rs. in 000's)
Projected
Actual
Total Operating income
Net Profit
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.

25. Ratio Analysis

26. Discount rate Risk free rate 7% Equity risk premium Beta 0.96* Ke
13.72%
*Beta from OLS Regression on monthly share prices

27. 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%

28. DDM Valuation

29. FCFE Valuation

30. Residual Earnings Valuation

31. Post Merger Performance
Profitability ratios
Operating margin (%)
Gross profit margin (%)
Net profit margin (%)
Adjusted cash margin (%)
Adjusted return on net worth (%)
Reported return on net worth (%)
Return on long term funds (%)

32. References ICICI and ICICI Bank Merger – A KRC Analysis
“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
Investor Presentations and Merger Presentations of ICICI (Source: ICICI Website)
 ICICI and ICICI Bank Merger – A KRC Analysis