Letter from... South Africa

The offer’s on the table. On 9 May 2005, Barclays Plc made a firm offer to buy at least 56% of South African bank ABSA. This follows approval by Finance Minister, Trevor Manuel, and has been publicly hailed as a vote of confidence in South Africa. It will see Barclays/ ABSA emerge as the biggest bank in Africa with a retail presence in 16 countries.

But it hasn’t been all plain sailing: there was some dissatisfaction from some fund managers in the lead up to the offer.

Ross Jenvey, banks analyst at Andisa Securities, says that price was half the issue. Barclays initially indicated it would pay around R79,50 per share. The final offer raised this to R82,50. Including ABSA’s final dividend for its year ended March 2005, shareholders will receive R84,50 in total. Now, says Jenvey, Barclays is paying fair value.

The second issue was the draft structure of Barclays’ offer. Initially, Barclays tabled an offer for 60% of all shareholders’ stakes. Jenvey comments that many fund managers were not prepared to sell this proportion of their shares. They wanted the option to participate in the possible upside from an estimated R1.4bn in annual pre-tax synergies for ABSA three years out. In addition, given a shrinking investable universe in South African-domiciled stocks, they were concerned about the effect the Barclays’ deal would have on ABSA’s liquidity. This concern was resolved by Barclays restructuring the offer so that fund managers were only required to sell 32% of their shares, with the option to sell a further 28% at the offer price. Ahead of the ABSA shareholders’ meeting on 13 June, Barclays had written support from 63% of the South African bank’s shareholders. Although the deal can’t go ahead until all legal approvals have been obtained (which Barclays’ management expects by mid-July), the current offered price is firm.

Analysts and fund managers are generally positive, although there are a “few” niggles. For Barclays, ABSA is about more than Africa - it’s about diversifying its earnings’ stream. Dominic Bruynseels, CEO of Barclays Africa and Middle East, points out that Barclays Plc’s goal is to broaden its earnings base outside of the UK. Non-UK operations currently contribute 20% to earnings. With ABSA contributing from year one, this will increase to 30%. Bruynseels believes that South Africa’s ongoing consumer boom means that the country’s growth prospects are attractive. In addition, ABSA provides an entrée for Barclays to bank South African corporates that have moved into other African countries.

Jenvey believes that the deal has five advantages for ABSA itself. First, Barclays brings expertise in areas where ABSA lacks scale, such as corporate merchant banking and asset management. Barclays will also add to ABSA’s systems, particularly in customer relationship and credit management. These systems are the key expense for ABSA, which will spend R1.8bn over the next three years to extract the estimated R1.4bn in annual cost savings that the merger will bring.

Third, Jenvey believes that having a stronger parent will mean a credit upgrade for ABSA. In turn, that means access to cheaper second-tier capital and will make it easier to attract quality deposits.

From a staff perspective, ABSA’s employees will now be able to take advantage of global secondment opportunities. Lastly, the integration of ABSA and Barclays’ African banking operations improves the quality and scope of ABSA’s emerging African banking empire.

According to Bruynseels, the enlarged group will continue to operate under both brands in South Africa.

Whatever the brands, it’s certain that a new force is emerging in the banking sector. Now, we’re waiting to see which of Barclays’ competitors will make the next move.

Kirsty Laschinger is a freelance writer for a number of South African publications and is a chartered financial analyst.