Are Indore Bank shareholders short-changed?

State Bank of India has proposed to acquire its hitherto subsidiary, State Bank of Indore popularly known as the Indore Bank. The proposal envisages allotment of 34 shares of SBI (State Bank of India) for every 100 shares of the Indore Bank. Is the proposal equitable?

Public shareholding in the Indore Bank is only about 1.95% The shares are not being traded and therefore there is no market price as such. Hence the theoretical value of the share needs to be calculated. Typically share value is calculated based on Earnings per share, Dividend per share and Book value of share. Let us see how these work out for the Indore Bank vis a vis SBI.

EPS for the Indore Bank is Rs.159.40 and for SBI Rs.143.77, both for the year ended 31.03.2009. Dividend per share for the year is Rs.15 and Rs.29 respectively. Book value of share is Rs.893.75 and Rs.912.73. Of these values, dividend per share is the least favourable for the Indore Bank shareholder. If we consider this as the basis for share exchange we are taking the most disadvantageous basis for the Indore Bank shareholders. Even by this unfavourable yardstick, the exchange ratio must be 51.72 shares of SBI for every 100 shares of the Indore Bank. (15/29 of 100).

Let us now consider another ratio that is important for banks. Return on Average Assets is 0.88% for the Indore Bank and 1.04% for SBI. This can be taken as a proxy for Brand value. It is expected that funds will be cheaper for a better branded bank and therefore its return on average assets will be better. Discounting the exchange ratio of 51.72 for 100 keeping in view this factor, we arrive at 43.76 shares for 100. (51.72*0.88/1.04)
Thus even by the most pessimistic estimate, 43.76 shares of SBI for every 100 shares of Indore Bank is what the shareholder of the Indore Bank must get. Offering only 34 shares of SBI means there is a further unfair discount of 22.30% (100*9.76/43.76)

I am not a shareholder in State Bank of Indore; therefore, I do not have a vested interest in the calculations.