African

Finweek English Edition - - COMPANIES & INVESTMENTS - Bruce Whit­field

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.

Kokkie Kooy­man

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