IDFC Bank-IDFC Merger: Who Stands To Gain From Share-Swap Ratio?

IDFC First Bank Ltd. approved the merger of IDFC Ltd. and IDFC Financial Holding Co. with itself.

Under the proposed transaction, investors will get 155 shares of IDFC First Bank for every 100 held in IDFC.

Shares of IDFC surged to a 52-week high on Monday ahead of the announcement. The stock ended 1.92% higher on Tuesday.

At Monday's closing price, the spread was 16.3% in favour of IDFC investors, but narrowed to nearly 9% on Tuesday.

The merger was a long time coming and will take 12–18 months to fructify, according to Deepak Shenoy, founder of Capital Mind.

Given the timelines, the premium can also widen, as seen in the past with other mergers, he said. Moreover, at the RBI's request, the proposed swap ratio can also be modified, he said.

Shenoy suggests an arbitrage strategy for IDFC. "One could hedge their position by buying IDFC and shorting IDFC First Bank Ltd.," he said. "Such a position can lock in your capital till the merger takes place."

The amalgamation can be a good investment if the investor looks to gain from merger arbitrage, said Shenoy, but it may not cut it for everyone.

According to Shenoy, IDFC First Bank has offered good returns from an earnings perspective in the last 12–18 months and can be a smart long-term investment if its current risk exposures are mitigated and the company benefits from economic growth.