How to benefit from reverse merger of Ujjivan Financial Services

Axis Securities has recommended that investors buy Ujjivan Financial Services to capture 15 per cent arbitrage opportunity for Ujjivan Small Finance Bank. 

Ujjivan Financial Services had announced a reverse merger with Ujjivan Small Finance Bank. Ujjivan Small Finance Bank will issue 116 equity shares against ten equity shares of Ujjivan Financial Services as per the Scheme of Amalgamation. The company announced the said merger on October 14, 2022.

Ujjivan Financial Services (UFSL) convened with the NCLT on September 8 for matters relating to the scheme of amalgamation between Ujjivan FSL and Ujjivan Small Finance Bank (UFSB). They received the NCLT approval for the merger.

“The company is convening the EGM of its shareholders on November 3 or e-voting period. The ex-date is expected to be announced post November 3.The expected timeline for the completion of merger process would be 3-4 months from now, subject to all the remaining approvals,” the domestic brokerage said.

How it works?

Axis Securities conducted its analysis when the price for USFB was Rs. 52/share and Rs. 520/share for USFS. The current respective prices are Rs 54.50 and Rs 533.75 on the BSE.

“This means for every 10 shares of Ujjivan Financial Services Ltd (Rs.520×10), 116 shares of Ujjivan Small Finance Bank will be issued (Rs.52×116). This provides an opportunity to buy Ujjivan Small Finance Bank shares at a discounted rate by going Long on Ujjivan Financial Services. For every share worth Rs. 5,200(520×10) of Ujjivan Financial Services, shares worth Rs. 6,032 will be issued (116×52) of Ujjivan SFB.”

This represents an opportunity to buy Ujjivan SFB at a 15 per cent cheaper rate compared to buying directly from market, it further said.

Shareholding of Ujjivan SFB

Ujjivan Financial Services holds 73 per cent shareholding of Ujjivan SFB, and the holding company is 100% public.

Post the reverse merger, the promoter must reduce its stake in the shareholding of SFB to 40 per cent within five years from the date of operations. Subsequently, it must be brought down further to 26 per cent over 10-12 years.

According to Axis Securities, this arbitrage creates a more economical way to Buy Ujjivan Small Finance Bank (15% discount). “We have a Buy rating on the Ujjivan SFB stock with a TP of Rs.60/share at 1.9x FY25ABV which could further accelerate the returns.”