Barclays sale of Absa: An abject lesson in the cost of overpaying – and not

It’s a big day for the 33 000 Absa staff. They are set to hear that British parent Barclays, which re-entered SA with such fanfare in 2005, is now leaving. Management will have been preparing for this since December when news first emerged the embattled UK-headquartered group was considering all options, including the previously unthinkable offloading of one of its four pillars. It is in the nature of these things that changes in parentage creates uncertainty for staff and customers. Absa’s executives will have been working around the clock to establish certainty, so expect the buyer to be named soon. The departure of the British bank – at a capital loss of around £400m – is a reminder of the capital allocation brilliance – and luck – of former Sanlam CEO Johan van Zyl. His best decision in 15 years at the helm, he told staff at a farewell last year, was to sell 124m Absa shares which Sanlam inherited in the creation of the new banking group. Van Zyl and then financial director Flip Rademeyer were initially hoping to get around R40 a share for their stake. But Barclays was so hot for the deal Sanlam eventually sold out at R82.80. The R10bn raised was reinvested in Sanlam’s own shares through share buybacks at a price of R15.72. In the ten years since, the compound annual growth in the Sanlam share price was 13%. Because it overpaid at the outset, the Barclays investment in Absa (now Barclays Africa, soon something else) appreciated by just 5% a year, well below the Rand’s rate of depreciation. Had Barclays managed to acquire the shares at the R40 Van Zyl and Rademeyer thought they were worth, the UK group’s return would have been 13%. Provided they’re effected at the right price, share buybacks are one of the smartest ways for CEOs to allocate capital. Overpaying for acquisitions, clearly, one of the dumbest. But I guess John Varley, the Barclays CEO of the time, won’t be owning up to that anytime soon. – Alec Hogg

By Rene Vollgraaff and Amogelang Mbatha

(Bloomberg) — Barclays Plc’s possible withdrawal from South Africa may turn out to be the economy’s biggest no- confidence vote at a time of financial-market turmoil and policy uncertainty.

As the economy hovers near recession and a credit-rating downgrade to junk looms, speculation is mounting that London- based Barclays Plc may sell its 62 percent stake in its Africa operations, valued at about 72 billion rand ($4.5 billion). About 80 percent of Barclays Africa Group Ltd.’s profits come from South Africa, where the currency has lost 35 percent of its value against the dollar since the start of 2014.

A screen displays the ticker symbol and information for Barclays on the floor of the New York Stock Exchange (NYSE) in this February 9, 2016 file photo. REUTERS/Brendan McDermid/Files
A screen displays the ticker symbol and information for Barclays on the floor of the New York Stock Exchange (NYSE) in this February 9, 2016 file photo. REUTERS/Brendan McDermid/Files

“There’s been a very significant withdrawal of capital out of this country,” Nic Borain, a Cape Town-based political analyst and adviser to BNP Paribas Securities South Africa, said by phone on Monday. “Unfortunately, there’s no way of avoiding the conclusion that this may be seen as yet again a vote of no confidence in the economy’s growth potential.”

Barclays plans to exit its African business as part of an overhaul of the company and Chief Executive Officer Jes Staley will probably announce a company-wide review on Tuesday, according to a person with knowledge of the discussions.

Read also: PIC keen on raising stake in Barclays Africa, coy on how much.

Anglo Disposal

South Africa has been struggling to attract meaningful foreign direct investment as a slump in commodity prices and a slowdown in China weighs on growth. The news of a potential Barclays exit comes after Anglo American Plc said on Feb. 16 it may scale back its South Africa operations by selling coal and iron ore assets. Anglo lost three-quarters of its market value last year as metal prices slumped.

FDI into South Africa amounted to 8.9 billion rand in the first three quarters of last year, compared with 62.6 billion rand for the whole of 2014, data from the central bank shows.

Business confidence is near a 22-year low and the worst drought in more than a century threatens to cut this year’s economic growth rate to 0.9 percent, the lowest since the 2009 recession, according to government forecasts. Slow growth is a key concern for credit-rating companies such as Standard & Poor’s, which holds a negative outlook on South Africa’s BBB- credit rating, the lowest investment grade level.

Sentiment was damaged after President Jacob Zuma appointed two finance ministers in four days in December, sending the rand and bonds plummeting. Investors are still concerned about stability at the National Treasury amid what is seen as a power struggle between Zuma and Finance Minister Pravin Gordhan.

“The South Africa story is not as attractive going forward as it was,” Lumkile Mondi, a senior lecturer at the school of economic and business sciences at the University of the Witwatersrand in Johannesburg, said by phone on Monday. “South Africa has policy uncertainty, there’s indecision” and the growth “that was expected in the medium term now doesn’t look possible,” he said.

FDI into South Africa declined to 1.6 percent of gross domestic product in 2014 from 2.2 percent the year before and is almost half the ratio of 3.3 percent in emerging-market peer Malaysia, according to World Bank data.

Read also: Nene firing aftershock – Barclays UK wants to sell R73bn SA subsidiary Absa

Barclays first bought a controlling stake in the South African lender in 2005 as part of a strategy to find growth outside of its home market, where lending was slowing, and to consolidate its businesses across Africa. A spinoff of the Africa unit may help to bolster Barclays’ capital, which is below its own target and the weakest of any major U.K. lender.

Barclays Africa dropped 6.1 percent to 136 rand in Johannesburg on Monday, the biggest one-day decline since Dec. 10.

“This is just another piece of straw on the camel’s back,” Bart Stemmet, an economist at NKC African Economics, said by phone from Paarl, near Cape Town, on Monday. “For a long time there was the sense that investors will come because we have growth, but now we don’t have growth anymore. We are far behind, not just in giving investors certainty around legislation, but also by actively courting foreign investors.”