By Jan Meintjes, 11 February 2013
Absa and Barclays, which announced in August 2012 they were going to merge their African operations, are clearly looking to take advantage of the opportunities on the continent too. The deal is due to be discussed at the bank’s general meeting later this month.
So why do we think this is a good deal? Apart from the obvious growth expectations, there are three factors that stand out. We believe that the asset ABSA is buying is virtually impossible to replicate (at least over a short- to medium-term time horizon); it is a relative low risk acquisition and given these factors the price is fair.
Banking is a scale business. It is very difficult to achieve scale in any business if you start it as a greenfields project. This is even more difficult in Africa and to do this in seven or eight countries on the African continent at the same time is surely a Herculian task. In banking, as in many scale businesses, market share is critical.
To compete effectively, you want to be in the top five positions and preferably in the top three. Kenya, Ghana, Botswana and Mauritius make up almost 80% of the profits of the acquisition. In Botswana, Barclays is number 1, in Kenya and Mauritius number 3 and they are 4th in Ghana. In three of these countries they have been in business at least since 1925 and in Botswana since 1950. Barclays Africa was built over a period of almost a century from 1919 and it would simply be impossible to build a similar business, even over a 10 or 20 year period.
From a risk point of view, acquisitions in Africa are generally fraught with danger as reporting standards are very different, compliance procedures are unfamiliar and disclosures are certainly not standard. Management retention and alliances with business partners are crucial. Being part of the Barclays group and reporting structures for many years, these risks are greatly diminished in this case. Given that ABSA is buying a portfolio of assets spread across eight countries, diversification reduces these risks even further.
It is worth noting that 25% of the assets of this acquisition are in Tanzania, Ghana and Zambia. All three of these economies are on the list of the 10 fastest growing economies in the world (IMF expectations from 2011 to 2015 for countries with more than 10m people), with forecasts exceeding 7% growth a year. Although Barclays have smaller operations in these countries, they have the second and fourth largest banks in Zambia and Ghana based on banking revenues.
The SA banking sector is currently trading on average at a price-to-book value of two times, with average return on equity (ROE) at around 17%, expected to rise to around 19% over the next two years. We think paying a similar multiple for a portfolio of assets in Africa that are expected to achieve faster growth at higher ROE’s (ABSA disclosed the ROE for Barclays Africa at 22%) is a good deal and one we would support.