Merrill Lynch acquires 12% in Sharekhan

Baring Private Equity has pipped financial services giant Merrill Lynch to acquire a 12% stake in Mumbai-based Brokerage firm Sharekhan in a deal worth Rs 240 crore.

This deal values the brokerage company at Rs 2,000 crore. The transaction is through a mix of secondary sale by the largest shareholder of the brokerage firm Citigroup Venture Capital (CVC) and additional infusion of funds into the company’s capital.

ET had reported in its edition dated December 24, 2007 that Baring is among the group of investors negotiating to pick a minority stake in Sharekhan. Earlier, Merrill Lynch was believed to be the front-runner to pick this stake. Last year, CVC along with IDFC had invested around Rs 650 crore to pick 85% stake in Sharekhan. This translates into valuation upside of more than 125% in ten months. CVC owns 75% in Sharekhan while IDFC holds 10% and the management and employees hold the remaining 15%.

CVC India country head Ajay Relan confirmed that Sharekhan has inducted new investors in the firm, but declined to comment on valuations. Baring Private Equity India chief Rahul Bhasin could not be reached for comments and an email sent to him did not elicit any response.

Last year, CVC and IDFC together had acquired 37% equity owned by Sharekhan promoter Shripal Morakhia while 48% was acquired from other shareholders including GE, Intel Capital and some funds advised by HSBC PE India. As reported earlier, CVC was believed to be keen on diluting its stake in Sharekhan due to some regulatory issues. CVC, part of banking major Citigroup, had a significant majority stake in the brokerage firm.

A private equity firm holding substantial equity stake in an unlisted company would be classified as a promoter. If that company goes public, the PE firm’s sahres would have a lock-in period and cannot exit for a certain period. This could be one reason why CVC intends to dilute its stake, though it could not be verified independently.

A classification as a promoter also brings other aspects such as disclosure norms into the picture.

According to a source close to the deal, the latest transaction involved additional capital infusion by existing shareholders including IDFC which invested proportionately to maintain its 10% holding in Sharekhan pursuant to Baring investing in the brokerage’s equity capital. However, CVC’s stake has now come down to 63% from 75%. Incidentally, Baring already has an exposure in the sector through JRG Securities. It had picked a 44.8% stake in the Kochi-based brokerage firm for $35 million (Rs 140 crore) about a year ago.

Financial services firms, especially those with brokerage business, have been commanding high valuations in the stock market. While many of them have got corrected substantially by 40-50% in the recent market crash, some of them are still valued in the billion-dollar plus bracket.

Indiabulls Financial, even after spinning off its brokerage business into a separate firm Indiabulls Securities, which is to list soon, is the most valued firm at about $3 billion. It is followed by investment banking-cum-brokerage firm Edelweiss Capital which is valued at $1.25 billion, India Infoline ($1.15 billion) and JM Financial ($1.1 billion).

Sharekhan valued at Rs 2,000 crore is at the same level as that in December 2007. While other listed brokerage outfits have seen their value cut by as much as half in the stock market, Sharekhan, as an unlisted firm, has managed to retain its implicit valuation. Now it is valued ahead of Motilal Oswal which till recently carried a market cap of Rs 4,500 crore.