Better late than never for Barclays-ABSA merger

Euromoney, January 2013

It’s been seven years coming, but Barclays and Absa have finally struck a deal for the sale of most of Barclays’ African businesses to South Africa’s Absa.

Under the terms of the deal, Absa acquires Barclays Africa for shares worth R18.33 billion, and Barclays’ stake in Absa rises from 55.5% to 62.3%. The combined business, to be renamed Barclays Africa Group except for Absa’s South African retail and card businesses, will be listed on the Johannesburg Stock Exchange and will include Barclays’ operations in Botswana, Ghana, Kenya, Mauritius, Seychelles, Tanzania, Uganda and Zambia, as well as Barclays Africa’s Johannesburg regional office. It will cover 14.4 million customers through 1,300 outlets, employing 43,000 people in 10 countries. The deal doesn’t include Barclays’ Egypt and Zimbabwe’s operations.

Market response to the deal was broadly positive. It ends a messy arrangement and streamlines Barclay’s ambitions to be ‘One Bank in Africa’, as it puts it. It allows easier expansion of pan-African corporate banking and bancassurance in particular. For Absa, it diversifies earnings and provides better growth opportunities than are available in their existing businesses in South Africa. “The Barclays businesses are generating about 22% ROE,” says Johan Scholtz, head of research at Afrifocus Securities in Johannesburg. “Absa is currently on about 13%, and through the cycle is probably between 18 and 20%. So there’s a positive impact on profitability for Absa. Most of these Barclays businesses have an in-country history going back 70 or 80 years; they’ve definitely paid their school fees already. These are established businesses being taken over.”

All of this is true, but it has also been true pretty much since the idea was first talked about back in 2005, when Barclays acquired its 55% stake in ABSA. Indeed, Euromoney reported on delays to the expected deal in 2008. The argument has always been about price, so what’s now changed? Since 2005, “the banking landscape in Africa has matured significantly, as has the relationship between Absa and Barclays Africa,” says Maria Ramos, group chief executive of Absa and chief executive of Africa for Barclays. She says the operational alignment between the two businesses announced in 2010 “alleviated perceived combination risks. The proposed structure allows us to leverage the significant potential of our Africa businesses and follows on from the steps that we took last year to combine the businesses from an operational point of view.” She says she believes the key integration risks have already been dealt with, and that the new structure ensures a common strategy between the two owners for growth and expansion.

Instead, she sees the main challenges as external. “For business growth we need to ensure macroeconomic and political stability in the region,” she says, citing a recent McKinsey study in which 55% of respondents named macro conditions as the biggest factor preventing them from growing or hiring. She also raises challenges with inflation and demand, and the classic concern around African development: infrastructure. “Africa’s infrastructure deficit needs to be addressed,” she says. “However, given that this has been identified as a priority by governments in sub-Saharan Africa, we see this primarily as a major opportunity.”

The deal does raise some questions, though. Why not Egypt or Zimbabwe? “The macroeconomic and political situations facing Zimbabwe and Egypt makes it difficult to value those assets,” Ramos says.

And it is also worth pointing out what’s missing from the suite of businesses. “The countries that jump to mind outside of South Africa are Angola and Nigeria,” says Schultz. “Both of those are absent from the Barclays footprint.” It would be no surprise to see an expansion into those markets in future, whether organically or by acquisition, though presumably there are other priorities now; the deal is intended for completion in February despite needing approval from regulators in ten different markets. Asked about this heady pace during a media call, Barclays finance director Chris Lucas said: “We have spent a good six months working very hard with regulators through the affected countries, and I would describe it as making good progress.”

One interesting aside to the deal is that there are now two businesses that can claim to be pan-African, one with significant UK ownership, and the other Chinese. There are clear differences: Barclays/Absa now represents a degree of integration far greater than ICBC’s involvement in Standard Bank, in which it holds a 20% stake and two board seats. And ICBC, in the style of Chinese acquirers generally, has not (yet) tried to assert a significant influence in management style or direction at Standard. But as multinational interest in the opportunities in Africa grow, whether in commodities, sovereign wealth or infrastructure development, it will be interesting to see if the different nationalities of the backers lead to different approaches to strategy.