Mumbai: State Bank of India (SBI) has lined up five to six merger and acquisition (M&A) financing deals as the country’s largest lender deepens its presence in the growing corporate acquisition financing market, a senior bank official said.
“We have about five to six deals in the pipeline. We have already done four to five deals, including one very big one,” the official said, without disclosing any transaction details.
The deals pursued by the bank are largely driven by technology and industry-led, the official said. SBI’s focus on M&A financing comes after the Reserve Bank of India allowed domestic banks to finance corporate acquisitions from 1 April, opening up a new avenue for lenders to expand their corporate loan books.
On 13 February, the RBI issued the final guidelines allowing up to 75% bank funding of M&As, up from 70% in the draft norms. It also allowed such funding to both listed and unlisted companies, which was a change from only listed companies proposed in the draft. The RBI said banks will be allowed to fund the promoters' stake when they set up new companies.
“Total bank financing shall not exceed 75% of the acquisition value, as independently assessed by the bank," the RBI had said.
The move opened up a large funding avenue for banks, with annual M&A funding valued at about $40 billion. While SBI does not have a formal internal target for M&A market share, the official said the bank sees 20% as an aspirational share of the ₹2 trillion market.
For SBI, M&A financing is not only a fee- and interest-income opportunity but also a way to acquire new corporate relationships and expand its loan book.
Sun Pharma case
The recent financing of Sun Pharmaceutical Industries’ acquisition of New Jersey-based Organon is a case in point. Sun Pharma agreed in April to acquire Organon in an all-cash transaction valued at about $11.75 billion, including debt, making it one of the largest overseas acquisitions by an Indian company.
SBI subsequently joined a consortium of global banks financing the transaction. It was the only Indian bank among the 11 lenders, with each bank reportedly committing about $1 billion.
“Before this M&A deal, Sun Pharma was not our client. Now, after the deal, we will be lending to Sun Pharma as well,” the senior SBI official said.
SBI’s gross advances rose about 19% on year to ₹50 trillion in the quarter ended June. Of this, domestic corporate advances grew over 18% on year to ₹14 trillion.
However, pricing remains a key challenge in scaling up M&A financing, particularly as banks compete with global lenders for large corporate transactions. The ability to price loans competitively while factoring in the risks associated with acquisition financing will be critical for SBI as it seeks to increase its share of the market.
In March, SBI roped in Japanese banking giant MUFG Bank for acquisition financing and collaboration in other financial deals.