AU buys an SFB focused on microfinance

Target Date - February 1, 2024

AU Small Finance Bank (AU) is acquiring Fincare Small Finance Bank (Fincare) in a 100% share swap transaction.

  • Fincare is a rural microfinance focused business with 15+ years of experience
    • Microfinance is 53.9% of advances, followed by 18.9% Small Business Loans, 14.2% Home Loans, 10.2% Gold Loans and 2.6% others
    • It’s majorly focused on South with 49% of it’s total touchpoints in that region. West is 20%, East 16%, North 7% and Central 8%
    • It claims to be a “Digital First” Bank with focus on technology led operations across all aspects of banking
    • It’s majorly owned by private equity investors (details in the attached presentation, slide 21)
  • Shareholders of Fincare to receive 579 shares in AU for every 2,000 shares held in Fincare
    • Post transaction, existing shareholders of Fincare shall hold ~9.9% (fully diluted) in AU.
    • AU’s current mcap is around Rs 45,000 cr.
  • Other than the regulatory approvals, transaction is subject to capital infusion of Rs 700 cr by promoters of Fincare.
    • This amount is supposed to meet the business needs of Fincare till the merger is completed
    • Management has informed that valuation of this Rs 700 cr fresh infusion is same as what AU is paying for Fincare
  • Fincare will contine to per se operate as a separate vertical within AU
  • Rajeev Yadav, MD & CEO of Fincare will be Dy CEO of AU post merger
    • All Fincare employees to be onboarded as part of AU

Rationale of the merger

For AU – as per the management –

  • Strong management team of Fincare that AU gets
  • South focused operations of Fincare where AU has negligible presence (only 2% of it’s total touchpoints)
  • Microfinance business of Fincare that AU has not been focused traditionally.
    • AU was very hesitant to get into microfinance in the past due it’s inherent dynamics. The management now however believes that the business has seen multiple cycles and it’s now ready to look into it seriously. Besides, it’s super confident on Fincare’s existing management for execution.
    • As of now, AU+Fincare’s proforma combined business implies microfinance percentage of total business at 7.5%. AU expects it to maximum reach to 10% over the medium term.
  • Cross selling opportunities to AU and Fincare’s customers

(for various details on the two businesses and merger synergies as presented by AU’s management, please refer the management ppt) AU-Fincare-Merger-CompanyPPT

For Fincare –

It has an investor heavy ownership. The Company was speculated to be going for an IPO to provide them exit.

Merger with AU surely seems a better option both for the continuing management and the investors.

  • They get exposed to a better diversified larger combined franchise; and
  • They get allotted listed shares of AU (providing a better prospect on selling as needed)

Whether it’s a good acquisition?

Given investors’ experience with the microfinance sector along with the size of acquisition (relative to AU’s own size), unlikely that anyone will get excited.

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