Absa CEO Maria Ramos’s decision to acquire Barclays Africa’s operations overturns a seven-year old decision taken by the 2005 South African financial dispensation headed by her husband, the then finance minister Trevor Manuel. Then, the Registrar of Banks Errol Kruger deemed the deal as being too risky – now 75% of Absa’s minority shareholders will need to support it in order for the transaction to go ahead.
It appears likely the deal will meet little resistance this time around.
Without doubt, it is a good deal for Barclays that will further cement its stake in Absa and will stand to cream off even greater dividends as time goes by. Barclays needs a little magic. Over the past f ive years, Barclays shareholders are still down 55%, even over 10 years they are down 38%.
Barclays holds about 55.5% of Absa, which will grow to 62.3% of a Pan-African banking network post the deal, which also resolves a management conundrum as to how to manage disparate, low earning multi- currency assets from London. Dominated by the Absa contribution, Barclays Africa delivered 21% of Barclays’ 2011 pre-tax profit – the second biggest non-UK contributor after the US.
“These are not the best banking assets on the African continent,” says Neil Brown, joint head of the Electus Boutique at OMIGSA, “but strategically it is a good deal for Absa. We will only know in time if the bank paid a good price, but if you want to go from almost zero to the biggest South African exposure to the African continent you need a transformational deal like this one.”
Ramos says no control premium was paid, and the transaction is being priced at around 1.7 times average book value. In a market where competitors are squabbling over top quality African banking assets – pricing is closer to 3-4 times says one banker, himself on the hunt for assets on the continent.
Do not anticipate substantial returns in the short term cautions Kokkie Kooyman, fund manager at SIM Global, even though Ramos says the deal will be marginally earnings accretive from year one. Standard Bank has learned to its cost that volatile currencies erode returns, while costs rise disproportionately courtesy of new investment in technology and people as well as the sharp increase in regulatory and com- pliance costs.
“Standard Bank’s experience over the past 17 years has shown that African operations are not all that profitable, but you have to see future growth rates north of South Africa’s borders being bigger than our home market,” says Kooyman. Ratings agencies, too, are paying attention. Fitch said the merged entity could improve efficiency and allow for faster expansion in the region.
It’s also not as if Absa is going into this with its eyes shut. It has been managing the Barclays Africa assets for about a year since the move of the division’s HQ back to Johannesburg after its ill-considered shift to Dubai.
Barclays’ operations in Egypt and Zimbabwe are excluded even though they are run by the same Johannesburg-based team. They are deemed too risky for inclusion as part of the current transaction.
Critics say Absa has problems of its own in its home market and suggest the deal could be a distraction for an already stretched and inexperienced management team. That’s precisely why Absa poached two senior Standard Bank high-f lyers – Kennedy Bungane and Craig Bond – to head up the unified business earlier this year.
For Absa shareholders this is a punt on the future. Do they sacrifice a stake in the business now for future growth potential in what will be the continent’s biggest banking group with nearly 15m customers across 10 countries?
Well, that depends on your view of the African continent, labelled this year by The Economist and Time magazines as: “Africa Rising”. For The Economist in particular this was a big climbdown from its May 2000 “Hopeless Continent” cover.