CSB-Fairfax deal: Impressed by new management, Prem Watsa ready to pay more

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In May 2017, after several months of negotiations, billionaire Prem Watsa's Fairfax India Holdings discontinued talks with Kerala-based (CSB) to acquire a 51 per cent stake in the Price and valuation were cited as the reason. However, in February this year, the Indo-Canadian businessman decided to return to the negotiation table, this time with a bigger offer. What convinced him? Watsa credits the bank's new management for this.

Watsa, who has always believed in the founders and management of the he invests in, has said that he restarted the conversation after seeing MD & CEO C V R Rajendran's initiatives.

In a letter to Fairfax shareholders, he said Fairfax had discontinued its efforts last year because it could not agree with the board of on the price and valuation of the investment. While he did not mention about the price quoted by in 2017, sources and reports said the had demanded Rs 160 per share and an additional premium of Rs 10-15 per share.

Since then, CSB has pursued several avenues to attract capital at a valuation acceptable to it, but without success.

"Meanwhile, in anticipation of investing in CSB, we had identified Rajendran as the individual who would have been our choice for the CEO of the bank. He, in fact, was appointed as CEO about 14 months ago and is now well in control; he understands the bank and its loan book very well," said Watsa.

In late January, Rajendran reopened the conversation with Fairfax on the premise that based on improvements he had made to the bank, including loan recoveries and successful enhancements to its organisational structure, a new price and valuation might be acceptable to Watsa. This indeed turned out to be the case and Fairfax agreed to invest at Rs 140 per share, implying a multiple of 1.1 times the September 30, 2017, book value of each share.

While Rajendran had already implemented several positive changes, much more still needed to be done to improve and modernise CSB, so that it realised its full potential, said Watsa, adding that the capital Fairfax was infusing would be used to improve the bank's Capital Adequacy Ratio (CAR) and drive other necessary changes.

CSB reported a loss of Rs 974.7 million in 2017-18, as against a profit of Rs 15.5 million the previous year and a loss of Rs 1.49 billion in 2015-16.

Rajendran attributed the loss to an increase in non-performing assets (NPAs) against the backdrop of the state government's decision to waive off education loans, besides a distress faced by the cashew industry. He is confident that CSB will turn around in 2018-19.