Audacious Aldermore play: FirstRand takes on British banking beasts on their home turf

EDINBURGH — Johannesburg-listed banking giant FirstRand is set to take on the British beasts of global banking on their home turf. London analysts reckon FirstRand’s £1,1bn bid to buy challenger bank Aldermore will enable the group to diversify its earnings and mitigate economic and political risk brewing in South Africa. For Aldermore, the deal will provide scale and digital capabilities needed to compete more effectively with other challenger banks, predicts the Financial Times. The takeover will also allow FirstRand to allow new business written by another of its UK acquisitions, vehicle financier MotoNovo, to sit on Aldermore’s UK balance sheet. Currently MotoNovo sits on FirstRand’s balance sheet, which is vulnerable to the rand weakening. FirstRand plans to move into transactional banking in the UK. The FT reckons it is buying ‘growth on the cheap’. FirstRand’s audacious Aldermore play is a direct response to the Zupta scandal, with FirstRand chairman Laurie Dippenaar citing corruption, state capture and public ANC infighting pushing South Africa into junk status and hammering the economy. FirstRand is looking beyond SA for growth. – Jackie Cameron

By Donal Griffin and Renee Bonorchis

Africa’s largest lender by market value plans to take on Britain’s biggest banks with the takeover of Aldermore Group Plc as growth in its home market stutters.

FirstRand Ltd. said on Monday it agreed to buy all of Aldermore after winning the backing of the U.K. lender’s board and its largest shareholder. The offer, which values Aldermore at about 1.1 billion pounds ($1.4 billion), will help the Johannesburg-based company diversify away from South Africa, which accounts for about 96 percent of earnings and where economic growth is slowing to near levels last seen in the 2009 recession.

Johan Burger, chief executive officer of FirstRand Ltd., speaks during a meeting in Johannesburg, South Africa, on Thursday, June 18, 2015. Photographer: Dean Hutton/Bloomberg

“There’s plenty of opportunity for a challenger bank to go and keep giving it to the big banks,” Aldermore Chief Executive Officer Phillip Monks said by phone. The company hasn’t received competing offers and will now engage other shareholders after receiving irrevocable undertakings from funds advised by AnaCap Financial Partners LLP, he said. AnaCap holds more than 25 percent of its stock.

Fast-growing Aldermore is among a group of U.K. banks seeking to challenge the dominance of the nation’s four biggest lenders, which control as much as 80 percent of the market, by offering faster lending decisions and more personalized customer service. FirstRand is also facing increased competition from smaller banks and financial-technology start ups at home.

FirstRand will create a new division for its U.K. operations that will be headed by Monks and include both Aldermore and FirstRand’s auto-finance business MotoNovo, the CEO said. It will now “need to sit down” with MotoNovo and “think about the opportunities that we can work out together,” Monks said.

Premium Justified

FirstRand is offering 313 pence a share for Aldermore, 22 percent more than Aldermore’s closing price on Oct. 12. Aldermore rose 2.5 percent to 310 pence by 2:45 p.m. in London, extending gains since its March 2015 initial public offering to 61 percent. FirstRand climbed 1.3 percent to 53.09 rand for a market value of 298 billion rand ($21 billion).

The premium is justified because “we can accelerate our strategy, the fact that we get access to a banking license with a very well-regarded deposit franchise, the fact that we can get access to a great management team with a track record of delivery,” and the size of the transaction relative to FirstRand’s market value, FirstRand Deputy CEO Alan Pullinger said by phone.

The deal won’t impact the outlook provided when FirstRand released full-year earnings in September, he said, when the lender said it expects return on equity, a measure of profit, to be in the upper end of its 18 percent to 22 percent target. “The guidance we’ve given to the market around earnings growth, return profile and dividends will remain intact.”

Surplus Capital

The acquisition comes as FirstRand seeks to build offshore funding so it doesn’t need to rely on the South African government’s credit rating. The nation’s local-currency debt is at risk of being downgraded to junk by the end of the year because of political wrangling ahead of the ruling party’s conference to elect a successor to President Jacob Zuma.

“We can fund this entire transaction with existing cash resources,” Pullinger said. “We’ve been building up a lot of surplus capital. We continue to build up excess capital and we think we’ll continue to generate surplus capital post this transaction.”

The lender isn’t allowing concerns around Britain’s decision to leave the European Union to halt its expansion strategy, he said, given that it has become accustomed to operating nine subsidiaries in riskier sub-Saharan African markets. “All of those markets have also got some pretty heavy challenges and some scary political stuff going on,” he said. “We don’t for a moment minimize the concerns around Brexit, but it is a relative issue for us.”

The purchase may limit FirstRand’s ability to make large acquisitions in the rest of Africa, Patrice Rassou, the head of equities at Sanlam Investment Management in Cape Town, said by email. Combining Aldermore and MotoNovo would create a more sustainable business as the “two are complementary,” he said.

‘Glorious’ Run

FirstRand needs approval from 75 percent of Aldermore’s shareholders for the deal to go through, FirstRand spokeswoman Sam Moss said in a text message.

“Aldermore’s pretty glorious two-and-half years as an independently listed company appears all but over,” Ian Gordon, the head of banks research at Investec Bank Plc in London, said in a note. “We assume completion on the agreed terms within four months. We continue to anticipate little likelihood of any counter-bid or ‘sweetener’ to the existing offer.”

Aldermore released an earnings update on Monday that showed an improvement in its tangible net asset value to 176 pence from 152.5 pence at the end of 2016. That values FirstRand’s offer at 1.78 times, “which we see as reasonable, but hardly over-generous,” Investec’s Gordon said.

Source: Bloomberg

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