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Barclays: Absa takeover approved
Barclays announced that the South African Minister of Finance has approved Barclays application to acquire a 60% stake in Absa. The Board of Directors of Absa has voted unanimously to recommend the acquisition to shareholders.
The Absa Group is one of South Africa’s largest financial services organisations. The Group also provides products and services to selected markets in the United Kingdom, Germany, the United States, China, Singapore, Hong Kong and elsewhere in Africa. In the financial year 2004, Absa reported net profits of 4,505m rand (about £397m, Barclays reported profits of £4,603m) and total assets of 306,848m rand (£27,058m).
Barclays is offering Absa Shareholders R82.50 per share, 8.5% above the closing share price before the detailed annoucement was made in late April and about 36% above the closing price before the first announcement was made, last year. The total consideration of up to R33 billion (£2.9 bn), is the largest ever foreign direct investment in South Africa.
The proposed price values Absa at a PE of 8.9x (on earnings for March 2006), Barclays is currently on 9.7x, which means the acquisition will be slightly earnings accretive for Barclays.
Barclays’ expects synergies from the combination to improve Absa’s pre-tax profits by approximately R1.4 bn (£123m) per annum four years after completion, after implementation costs of approximately R1.8 bn (£158m) over the first three years.
Given that Barclays’ has only a small presence in South Africa (the bank pulled out in 1986 following pressure from anti-apartheid campaigners) it is not immediately obvious where Barclays can hope to improve efficiencies.
In SouthAfrica, Absa is percieved to be overstaffed and inefficient, compared to Barclays however, Absa’s operations seem fairly efficient. Absa earned a return on equity of 24.2% in the six months to September 2004 against Barclays 19.2% in the year to December 2004. Absa also reported superior net interest margins (3.87% against Barclays 2.59%) and Absa’s cost:income ratio was also slightly better than Barclays (57.1% against Barclays 59.8%). Absa also enjoys a higher level of solvency (12.3% against Barclays 11.5%) but the acquisition is expected to reduce Barclays Tier 1 capital ratio to 7% (from 7.6%) due to the increase in debt, which is needed to finance the acquisition.
Barclays says revenue synergies should be derived from, inter alia, “combining Barclays customer relationship management and product packaging capabilities with Absa’s retail franchise, leveraging Barclays world-class credit card risk management and pricing skills, applying Barclays capabilities and expertise in business and wholesale banking and significantly improved access to capital markets.”
This claim would be more credible if Barclays’ own performance was excellent, which it is not. While Barclays has improved its performance in the year to December 2004 (covered in our recent report), much of the growth has come from investment banking. Retail banking profits declined by 1%.
Barclays also says “cost synergies should be achieved through, amongst other things, the adoption by Absa of Barclays corporate banking platform in South Africa and operational
efficiencies, such as sourcing synergies through economies of scale, the acceleration of investment in operational and IT effectiveness, productivity enhancement in commercial banking, improving the credit risk management process for commercial and wholesale banking and the streamlining of certain back office functions”.
Again, as we have noted above, Absa seems to have lower costs than Barclays and while the larger entity will doubtless gain some economies of scale we tend to view promises of cost synergies with caution. There is believed to be enough room to improve efficiencies through more electronic distribution of products but the extent to which this will be possible in South Africa is unknown.
Barclays does have a lower level of non-performing loans (around 2% of its portfolio against Absa’s 3.8%) but this probably reflects the greater level of risk in South Africa. There is no guarantee that Barclays will be able to reduce this significantly.
Overall, the acquisition is likely to have a positive impact on Barclays earnings, Absa appears well run and has good growth potential. Barclays look like they intend to make few changes to senior management at Absa, which is welcome.
The share trades at 553.9p, on a PE of 9.7x (2005 earnings). The yield is 4.8%.
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