Trust me that this is not another
political article! In this post I’m hoping to give my views about Union Bank of
Colombo PLC trading under the code UBC.N0000. The recent drastic changes in the
capital structure and the governance structure and some of the comments that
appeared on a Sri Lankan stock market related online forum prompted me to think
of writing this post. To speak the truth everyone on the said online forum only
spoke about the tip of the iceberg and was completely missing what was below
the surface. Well, can’t blame them because they may be playing the trading
game. However, I’d like to look at the bigger picture as my hunch suggests that
I invest in UBC now.
History
of high-profile investing
The history of UBC is full of
high-profile investments in it. In 2007, Middle Eastern investor Prince Faisal
Al Abdulla Al Faisal Al Saud, the grandson of King Faisal of Saudi Arabia
invested c. LKR210 million in the bank. Co-invested with the Saudi Prince was
the local investor Mr Alex Lovell one of the most inspiring Investment Bankers
in the country to me!) who brought in Rupee-to-Rupee as well. Both the
investors acquired 10% stakes in UBC. Hence, the new investors valued the
Company at c. LKR2.1 billion. The Saudi investor’s holding is currently worth
about LKR373.5 million. That is approximately 1.8x the initial investment and a
9% CAGR over 7 years (ignoring dividend income). Returns to Mr Lovell were more
likely to be slightly lower.
June 2010, the Bank hit another
milestone with another LKR1 billion capital infusion from Malaysia based
Genting Group related parties. From the available information I assume that
they bought a share at c. LKR11.40 per share for a stake of 26.41% (via two
different entities, namely Vista Knowledge Pte Ltd and Select Gain Limited). At
that price the investor was valuing the Company at c. LKR3.8 billion.
Currently, their stake is worth c. LKR2.2 billion which is equivalent to a 2.2x
the initial investment or 22% 4Y CAGR
(in LKR terms ignoring the dividend income). (not too bad right!)
The Board of UBC approved another high
profile investment in August 2014. The deal was a landmark transaction in the
history of Sri Lanka and put Lanka on the spotlight globally.
Compared to all the other strategic
investors that UBC attracted so far, TPG are experts in running financial
businesses globally. For instance, Saudi investor is not an expert in running
financial businesses in the Emerging or Frontier market segment and similarly,
the Genting Group is leisure and hospitality based business.
Retailer hullabaloo
I came across some comments on a web
based forum in Sri Lanka where the forum participants saw the entry of TPG as
bad thing for the company. In fact,
under the transaction, TPG has brought in three times more capital that the
other shareholders brought in over about 19 years since the inception. Without
capital any company’s growth is hindered so I think capital from an investor
like this should be welcome.
TPG
in Asian Region
As per the TPG website, their approach
to investment is “TPG's approach to
investing helps us recognize value – or the potential for value – where others
cannot see it. This contrarian philosophy has delivered consistent and
outstanding performance because we dedicate the right mix of capital, time, and
management, and operational expertise, to make successful investments out of
challenging situations. Some of TPG's most noteworthy accomplishments have been
in situations involving complicated structures, cyclical and regulatory risk,
and distressed and turnaround situations. We maintain a mid to long-term
perspective on investments to help companies grow to meet their full potential”.
TPG entered the Asian region in 1994 and
since then transacted several landmark minority and majority stake transactions
within the region. I would like to shed some light on some of these
transactions as they may give you some foresight as to what they would be
likely to do with UBC going forward. (however, I will only focus on Finance
Sector related transaction as there are many transactions in many diverse
sectors).
TPG’s acquisition of Shriram TransportFinance Company Ltd was a classic example. The picture below shows the growth
numbers achieved by STFCL after capital infusions by investors like TPG.
Assets
under Management of INR2.9 Cr inFY04/05 grew to INR53.1 Cr by FY13/14. (That’s
a 9Y CAGR of 38%). During the same
period, EPS grew from INR9.06 to INR55.72. If you want to do a further analysis
you can find their FY08/09 Annual Report here and FY13/14 Annual Report here. It
is believed that they exited the investment with hefty gains. The price chart of STFC on NSE is provided below. BSE chart can be accessed here.
One interesting thing about their entry
in to a firm is that they are able to bring in other PE or institutional
investors to the investee company if there was further capital required.
Moreover, they exit through trade sales or via public market through block
sales to other PE or Instos. You can get an understanding about common PE exit
strategies from here. This helps in avoiding sudden market price volatilities.
TPG’s successful entry in to China’s
financial sector and its exit are also notable. It’s ASEAN region presence was highlighted
when they invested in BankThai, currently known as the CIMB Thai Bank. In Indonesia, they took a significant stake in BankTabungan Pensiunan Nasiona (BTPN.JK) in 2008. Later in 2013, they partially
sold its stake to Sumitomo Mitsui Banking Corp (SMBC). This chart shows the
performance of BTPN.JK since 2008.
In another investment by TPG, they took a 51% stake in Korea First Bank in 2000. TPG’s website mentions, “Korea First Bank: In 2000, TPG acquired a 51 percent stake in one of South Korea's oldest and largest banks. This represented the first foreign acquisition of a Korean bank. TPG rebuilt the failed franchise by creating new financial controls and risk assessment tools, and repositioning it as a retail bank”. In 2005 they sold the stake in Korea FirstBank to Standard Chartered PLC. It is believed that TPG invested KRW500 billion and sold it in an all-cash deal of KRW3.4 trillion (c. USD3.3 billion).
What’s
next?
Right now UBC is sitting on billions of
cash that was injected by TPG. Hence, the company will be in a position to grow
the loan book rapidly with good quality credit. Why I believe so is because I
think now they are in a position to compete with many players on a pricing
perspective and penetrate in to their market very fast.
So, gathering from the above, I can
predict that there will be quite a number of corporate activities over the next
4 to 5 years period at UBC. They may include allotment of shares under ESOPs,
issuance of different types of financing instruments like convertible
structures, amalgamations, acquisitions (of other banks, venturing in to
stockbroking, insurance, etc), conversion of the warrants (the warrants offered
to TPG in UBC were in-the-money even at the point of issuance and continue to
be in-the-money as I write this), aggressive dividend payments, further ratingupgrades, etc.
Find the Directors views here.
Further, it is interesting to note the
representatives that TPG have brought on to UBC Board of Directors. The three
Directors are Dr. P. J. Nayak, Mr. Michael J. O’Hanlon and Mr Puneet Bhatia. Havea look at their profiles. They bring in a wealth of knowledge and experience to
the table. For instance, Mr Michael was has served on all the boards of the
discussed investments in Asian finance sector by TPG. So, I wouldn’t be
surprised if UBC introduces commercial and residential mortgage products to the
Sri Lankan market.
Exit
already designed, so keep watching!
There will be a gradual exit by TPG
where I expect blocks of 15% of the Company will be sold to other strategic
investors via Trade Sales (over the next 15 years). Also I suppose that there
may be Secondary Equity Offerings (SEOs) to the general public in major sell
down by TPG. Further, there will be further dilution as TPG exercises the
Warrants. Hence, over the planned period there will be a huge increase in the
shares in the market. (though I don’t expect the investors who join later to
sell down in the short term causing price to crash.) However, it is worth
watching the developments.
Bottomline
From what I believe the entry of a PE
investor like TPG to a company is a good sign from all the investors’ point of
view. I also think that in the next few years UBC.N0000 will be mostly driven
by a variety of news that will flood the market. Value creation will be the
ultimate motive for TPG as PE investor and a successful exit to them will only
come through value creation. Hence, I think it is in the best interest of every
shareholder that TPG will act.
