Merger overhang keeps IHF, LVB stocks under pressure

ET Intelligence Group: Despite positive brokerage reports on the proposed merger of Indiabulls Housing Finance (IHF) and Lakshmi Vilas Bank (LVB), both the stocks have fallen nearly 10 per cent each from their prices on the day the deal was announced last week.

As a result, LVB is now available at over 30 per cent discount to the price implied by the merger ratio of 14 shares of IHF for every 100 shares of LVB. Market trackers cite regulatory uncertainty about the completion of the deal as a reason for the weakness in stock prices.

LVB’s stock price on Wednesday was 0.107 times that of IHF, which was lower than 0.14 times suggested by the merger ratio.


Most brokerages covering the two companies believe that the merger would be a positive development.

However, since there is little track record of the RBI approving a licence for entities with interest in real estate and capital markets, investors are being cautious. They may wait for RBI’s approval for the merger, Morgan Stanley pointed out in a report.

Edelweiss has come out with a ‘buy’ report on ‘Indiabulls Housing Finance’, but admits to the uncertainties over the merger. The report said: “The critical question is whether the deal measures up to regulatory rigour the Reserve Bank of India is known for. While the deal makes the compliance cut-off and is within the purview of the policy framework, similar transactions in the past indicate an element of subjectivity in handing out banking licenses by the RBI.”

Gagan Banga, MD, Indiabulls Housing Finance, told ET in an interview that they had made all the necessary checks before taking the merger decision and were confident of receiving the necessary approvals. However, the process could take nearly six months.

Opportunity for some?

To do away with the uncertainties, some traders have taken long positions on LVB and shorted IHF. In case the merger goes through, gains will be made as the current discount to the merger ratio will gradually vanish.

On the other hand, a short position on IHF offers a hedge against any negative development.

On Wednesday, LVB stock hit the lower circuit for the second consecutive day, before some buying emerged. It fell 4.3 per cent to Rs 88.45. Indiabulls Housing Finance closed 0.9 per cent lower at Rs 824.4.