US private equity firm TPG is acquiring up to 75% of Union Bank of Colombo (UBC) for $117 million, the largest ever buy out in Sri Lanka and a vote of confidence in the island's economy as it emerges from 26 years of civil war.
Sri Lanka now has one of the fastest growing economies in the world, and to keep the growth trajectory on track its central bank has been looking at ways to bolster the stability and competitiveness of the country’s inefficient and largely state-dominated banking system. It approved TPG’s investment in UBC on August 6.
“As a strategic and first-time investor in Sri Lanka, we are very encouraged by the country’s economic growth momentum and the central bank’s policy initiatives to enhance the country’s banking sector,” said Tim Dattels, TPG’s Asia co-head said in a press release on Thursday.
Notably Sri Lanka's has also allowed TPG to breach the ownership cap in Sri Lankan banks. Investors can only buy 10% of a bank in Sri Lanka according to the Banking Act No. 30 of 1988. They can buy up to 15% with approval from regulators. TPG is buying up to 75% of UBC. Discussions with management and the regulators took about nine months to hammer out the details, according to a person familiar with the matter.
The Texas-headquartered firm has a track record of turning around and growing banks in Asia. It became the first foreign firm to control a Chinese bank since 1949 when it invested in Shenzhen Development Bank. The firm sold its 18% stake in 2010 to Chinese insurer Ping An for around 11 times its original investment, according to industry sources. In South Korea TPG cleaned up the Korea First Bank after the 1997 Asian financial crisis and more then doubled its money when it sold the bank onto Standard Chartered in 2005. More recently TPG sold its 40% stake in Indonesia's Bank Tabungan Pensiunan Nasional (BTPN) to Japan’s Sumitomo Financial Group for $1.56 billion, or 4.5 times book value – one of the highest valuations ever paid for an Asian bank.
TPG has invested US$2.3 billion in 13 financial services companies in Asia as of December.
“Union Bank will be able to tap into TPG’s operational expertise and global resources to not only strengthen Union Bank’s balance sheet but also introduce new products and expand our network in order to offer better services to our customers,” said Alex Lovell, Chairman of UBC.
TPG and UBC plan to upgrade IT systems and risk management systems as well as add new products, according to people familiar with the matter.
Established in 1995, Sri Lanka’s eighth biggest bank by market capitalization UBC focuses on small and medium enterprises, and 60 branches. It is though, sub-scale and undercapitalized but TPG is hoping its investment will be used to significantly bolster the bank.
“We see great growth potential for Union Bank and aim to see it emerge as one of the top five commercial banks in the country [as measured by net worth],” said Puneet Bhatia, who is a partner at TPG and head of its India business.
Sri Lanka is relatively overbanked and dominated by state-owned financial institutions. The central bank has been pushing for consolidation and recapitalisation to ensure banks have enough firepower to finance the reconstruction that the country needs after the war and to keep the economy growing at its current clip. Foreign investors in Sri Lanka have worried about the growing role of the state in the economy; the entrance of private equity from TPG may slightly offset this perception.
The US private equity firm will invest in UBC via primary and secondary shares, representing up to 70% of the issued share capital. It will also buy 218.28 million warrants at SLRs0.30 per warrant that, if exercised in full within their six-year term at SLRs16.00 per share, would increase TPG’s stake to 75%.
Following a private placement of 742.16 million primary shares in UBC at SLRs15.30 per share, TPG will make an offer under the company take-overs and mergers code 1995 as amended in 2003 to the other shareholders of UBC to acquire up to the number of shares that TPG may acquire and hold under the approval granted by the central bank.
The private placement and warrants as well as the general offer are subject to conditions, such as shareholder approval.
The transaction will strengthen the tier-1 capital of UBC and enable UBC to meet the minimum capital requirement of SLRs10 billion set by the Central Bank of Sri Lanka, which will come into effect from January 1, 2016.
CIMB advised TPG.
TPG has agree to reduce its stake to 15% within 15 years, according to a filing on the Colombo stock exchange.
“A foreign investment of this size and nature is unparalleled in the banking industry in Sri Lanka,” said Lovell.
