Is Barclays Africa (BAGL) destined to become an orphan with no parent company? It has been five months since the book build in which UK lender Barclays Plc disposed of 12,2% of its holding in BAGL to a wide range of shareholders (see Financial Mail May 12-May 18). That was the easy part, and with 50.1% of the shares, Barclays is just a handful of shares away from relinquishing control.
BAGL deputy CEO David Hodnett says the process has not taken longer than expected, as there was always a two- to three-year horizon for completion.
BAGL and Barclays Plc have the complex task of ensuring that the operational separation of the two groups is orderly and, of course, that it preserves value for both sets of shareholders.
Barclays was at least able to give some news to impatient shareholders and analysts last week.
It has sold its 150-year-old Egyptian subsidiary to Attijariwafa Bank, the largest bank in Morocco, for US$500m. Barclays Plc and the then Absa could not agree on the right commercial terms to buy Barclays in Egypt or Zimbabwe, and officially BAGL has no regrets.
Andrew Vintcent, a portfolio manager at ClucasGray, says he can’t see any reason why most shareholders wouldn’t want to increase their holding in BAGL through a second round of book building.
"It is on a dividend yield of 6,5% and a p:e of nine, and a book build would be at a discount to that. And it’s not as if it is a bad business. It is well managed with a strong SA brand in Absa."
In the half year to June, BAGL, under CEO Maria Ramos, had headline earnings per share growth of 7%, as good as market leader FirstRand.
And BAGL has continued to evolve in spite of the distraction of the divorce.
Hodnett, a competent executive, has been put in charge of the entire SA banking business and promises the component businesses will work much closer together, while former Tiger Brands head Peter Matlare — though he has a controversial past — is in charge of African operations and has already done a lightning tour of all the operations, no doubt relieved that there aren’t any flour mills.
Barclays will be forced to consolidate BAGL in its accounts until it reduces its holding to between 15% and 20%. The next step is likely to be a big-bang sale of about 30% of BAGL.
Perhaps 5%-10% of the equity can be brought in to rebuild the staff incentive scheme. Besides the book build among a wide range of shareholders, and possibly some new foreign institutions, there are talks behind the scenes to build a black empowerment consortium to take a 10%-15% stake. But unlike the Batho Bonke consortium, which sold its interest in Absa four years ago, the members of this consortium will be expected to pay their own way.
The Public Investment Corp (PIC) is leading the discussions. "The PIC is still keen on participating in a consortium that could buy a further stake in BAGL," says Deon Botha, head of corporate affairs, "though nothing concrete has come out of these discussions yet."
Botha says the PIC wants potential partners in the consortium to be in a position to fund their portion of shares.
But it is likely that the PIC will stop short of becoming the shareholder of reference. It does not own its funds, nor are they government’s assets. They are managed on behalf of the members and pensioners of the Government Employees Pension Fund. And they require a liquid balanced portfolio, not a financial services empire. It is also not clear if the PIC qualifies strictly speaking as a BEE shareholder.
Botha says the Reserve Bank would have to approve before the PIC could become a shareholder of reference in any bank.
One name always comes up when cash-flush black empowerment companies are discussed and that is African Rainbow Capital (ARC), controlled by billionaire Patrice Motsepe and the rest of the Ubuntu-Botho consortium, which is Sanlam’s empowerment partner.
ARC co-CEO Johan van der Merwe says its preference is to take investments of at least 25% in niche companies such as asset manager Colourfield Liability Solutions and insurance broker Indwe Risk Services.
It recently broke this rule, however, to take a 10% holding in Alexander Forbes. An investment of, say, 5% in BAGL would take the bulk of ARC’s remaining free cash, though of course it has plenty of scope to gear.
The highest-profile interest in taking control of BAGL came from former Barclays CE Bob Diamond’s Atlas Merchant Capital in conjunction with his joint venture partner in Africa, Ashish Thakkar.
Of course, next to Motsepe they look rather puny. Atlas Mara was always too small to take control of BAGL; its market cap of about R6bn is dwarfed by the R70bn value of Barclays’ half share in BAGL. Its ticket to the game was the partnership of the giant private equity firm Carlyle.
But the SA Reserve Bank has made it clear that it does not want private equity investors controlling one of the big four banks. Carlyle promised to put in permanent capital and also to have a caring, sharing attitude and not take the traditional slash-and-burn approach typical of the private equity industry. But they remain pariahs at Church Square, as does its Dubai-based competitor Abraaj, which has formally pulled out of the bidding.
After the experience of Barclays, which is pulling out of SA for the second time — now after a sojourn of just 12 years — the Reserve Bank should have a more jaundiced view of the value of a shareholder of reference. A few names have come up as potential buyers, all in the Middle East and East Asia, such as Qatar National Bank and the China Construction Bank. And all these banks operate more discreetly than, say, Diamond, so they won’t talk until they are absolutely ready.
But it looks increasingly likely that BAGL will revert, as it was in Absa days, to being an independent widely held bank.