Commentary/ Yazad Darasha

A meaningful homecoming for SCICI

After almost a year of talking about it, the Shipping Credit and Investment Corporation of India is finally coming home. The proposed merger with its parent institution -- the Industrial Credit and Investment Corporation of India -- was approved by the joint board meeting on Tuesday, December 31, 1996, putting the crown on a year of mergers and acquisitions, and perhaps setting the pace for the new year as well.

After all, in a scenario that has become more and more competitive, the edge would certainly be with an entity that can bring more money muscle and leverage to the market.

Tuesday was also the day when the ratio of exchange of SCICI shares for ICICI's was be announced. And this is the figure that shareholders of both finance institutions were waiting for eagerly.

No one was disappointed, except perhaps the holders of extremely large chunks of SCICI shares, and that too very slightly. Because the ratio announced -- two ICICI shares for every five SCICI shares held -- is eminently fair.

Assume the merged entity will continue to be known as ICICI, it being the larger of the two. Assume that the weightage given the shares will not be on the basis of their respective discounted cash flows, considering neither is a manufacturing company.

That leaves the companies's respective net asset values; their earnings per share; and the average market prices of their shares over the last six months. These are the accepted methods of deriving an acceptable share exchange ratio.

SCICI's book value is Rs 35.40, while ICICI's is Rs 76.40. However, ICICI holds some 19.9 per cent of SCICI's equity (the figure has risen from 17 per cent at the end of 1995-96 to the current holding), which will be extinguished after the merger. That will leave ICICI's NAV at the level of Rs 79.29.

By this method, the share swap works out to 2.3 shares of SCICI for each share of ICICI.

By the EPS method, the ratio is about the same -- 2.35 SCICI shares for each ICICI share -- given that SCICI's EPS is Rs 6.70 while ICICI's is Rs 15.75.

And finally, taking into account the average market price of the two companies in the last six months, the ratio comes to 2.15. The SCICI share has logged an average price of Rs 33.60 while ICICI's has been Rs 72.50.

However, this swap ratio does not take into the account the extinguishing of ICICI's holding in its one-time subsidiary. Nor does it take care of the debentures and bonds subscribed to by one in the other (ICICI holds about Rs 1.17 billion worth of SCICI debentures, while SCICI too holds a so-far undisclosed chunk of ICICI debt).

Given these three factors, a share swap ratio of 2.26 shares of SCICI for each ICICI share seems fair. Rounded off, it would work out to about 9 SCICI shares for every 4 ICICI shares. The boards of the companies have announced 5:2 -- not too far off our reckoning.

The announced ratio is weighted in favour of ICICI shareholders perhaps because there are more of them. Besides, the figure we have worked out does not take into account the rupee and dollar debt that each company has outstanding, as a percentage of total income.

ICICI may have a relatively lower dollar debt to service (remember that SCICI has to pay $ 25 million to Chemical Securities Asia every year for four years commencing 1995 -- the call-up that had left SCICI gasping for breath over a year ago -- of which it has not yet provided for Rs 508 million in its balance sheet). That does change the share swap ratio, although not meaningfully, as SCICI has, on the other hand, a lower percentage of non-performing assets. In fact the merger will lower the collective NPA percentage of the merged entity to about 6 per cent.

Let's now look at the merger balance sheet. On the asset side, there are definite gains.