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IT IS deja vu at Absa as the bank and parent Barclays dust off plans to merge their African networks?
When Barclays bought its controlling stake in Absa in 2005, phase two of the deal was meant to be for Barclays to sell its African network to Absa, but that plan was shelved when South African regulators poured cold water on it concerned that the complex series of transactions would add too much risk to the primary transaction. It came back to life in 2008, but was decidedly dashed by the financial crisis. This time, though, the deal has a real shot of happening.
The big question is what price Absa should pay for the Barclays African businesses. The Absa share price reacted negatively to the news, indicating concern that Absa might overpay. The governance will be tricky. Absa has already said its independent directors will oversee the process. They will have their work cut out to lobby for decent prices, despite having the Barclays team across the boardroom table.
Absa’s minority shareholders will have to keep a firm hand on the process and will be critical to the success or failure of a deal — a shareholder vote will be needed and Barclays, as a conflicted party, will not be able to vote.
Considering all this is getting going while Barclays is without a CEO or chief operating officer (both having fallen to the Libor scandal), the negotiations are going to be rather fraught.
It doesn’t help that Absa is still without a permanent chairman, and Barclays has just appointed a new one itself. Apart from Absa CEO (and Barclays exco member) Maria Ramos, who now has group responsibility for Africa, there isn’t clear leadership to champion the process. Former CEO Bob Diamond had a big vision for Africa and that has permeated the ranks. Already the Barclays and Absa African teams are operating as a single unit from Johannesburg. It is now being led by Kennedy Bungane, who was poached from Standard Bank this year.
Absa Capital is starting to make use of the Barclays network, for example launching the wildly successful NewGold Exchange Traded Fund (ETF) in Ghana last week as that country’s first ETF. The Barclays’ Africa head office was moved to Absa Towers in Johannesburg from Dubai last year, four years after it had shifted from Johannesburg to the emirate in a colossal waste of money. So much has been done at an operational level already.
Barclays has operations in 10 African countries, most of which generate a tidy profit. Last week I met the leadership of its operation in Ghana, where its bank generates a neat return from gathering very cheap deposits and investing in government securities, and funding a loan book of commercial and unsecured personal loans. That simple business model delivers a 25% return on equity.
It has good operations in Botswana, Kenya, Egypt, and other markets, but is noticeably absent from Nigeria. According to SBG Securities, the Barclays Africa operation delivered $244m in profits last year.
SBG reckons the network is worth $1bn to $1.4bn. That calculation takes a price:earnings ratio of eight and discounts it for the central costs that Barclays picks up. If R12bn is a reasonable price tag, it represents about 12% of Absa’s value. Barclays will push for a bigger number than that, but minority shareholders will push just as hard the other way.
Apart from those difficult pricing negotiations, regulators in 10 African countries, including SA, will have to be won over. That is also a big ask. And if they do manage to chart a path through those mine fields, there’s the question of how Absa should pay.
Most of Barclays’ Africa operations are strongly capitalised, so integrating them with Absa’s balance sheet could help certain capital ratios. Help, that is, from a regulator’s perspective, but weigh down the balance sheet from a shareholder’s point of view. So it may be worth Absa’s while to pay at least partly in cash. Barclays, though, may also use the opportunity to push up its stake in Absa from the current 56%, by taking payment in shares.
It seems Absa and Barclays have been moving towards a consolidated operation, while the tricky issue of the shareholder structure was left on the back burner. But that leads to awkward problems on cost allocation and efficiencies. Combining them into a consolidated entity is the obvious thing to do, and I think Barclays has been steadily making that more obvious to get the regulatory buy-in needed, with a very British form of persuasion.