This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 PRETORIA 004582
SENSITIVE BUT UNCLASSIFIED
E.O. 12958: N/A
TAGS: EFIN EINV ECON SF UK
SUBJECT: SOUTH AFRICA: BARCLAYS TO BUY ABSA
1. (U) Summary. President Mbeki has publicly given his
support for Barclays Bank's planned bid to purchase a 50.1%
stake in ABSA, the fourth largest bank in South Africa.
While Finance Minister Trevor Manuel has the final say,
Mbeki's support certainly paves the road for approval. The
acquisition represents a clear departure from previous
government policy to keep the four large banks South African
owned. Industry insiders believe that Barclays' takeover of
ABSA will be positive for South Africa, but are not sure that
it will lead to more competition and thus lower banking fees
as the government and consumers would like. Some local labor
and political organizations have voiced reservations about
potential job cuts and capital leaving the country, but
neither of these events is likely to happen in this case.
Barclays' Interest in ABSA Goes Public
2. (U) On September 23, Barclays confirmed its intention to
purchase a 50.1% stake in ABSA, the fourth largest bank in
South Africa, for R20 billion (approximately $3.1 billion).
ABSA's board has reportedly accepted Barclays' bid in
principle, but a final offer will not be made until South
African Reserve Bank (SARB) regulators approve Barclays' bid,
and Barclays can complete due diligence on ABSA. Due
diligence will determine Barclays final offer price and
percentage stake. It will then be up to ABSA shareholders to
accept Barclays' offer, Barclays' shareholders to approve the
deal, and South African Finance Minister Manuel to give a
3. (U) Several weeks before Barclays emerged as ABSA's
suitor, as Barclays talked to Sanlam about its 21.3%
shareholding in ABSA, rumors abounded about a foreign
takeover of a local bank. On September 23, Barclays and ABSA
came clean with the announcement that, indeed, they were
talking to each other. Sanlam, a South African financial
services company, is ABSA's leading shareholder. Sanlam also
relies on ABSA retail outlets to market its insurance
products, a practice it would want to continue after Barclays
4. (U) U.S. financial advisors are involved in the
acquisition. JP Morgan is advising Barclays, while Merrill
Lynch and Goldman Sachs are advising ABSA. The acquisition
of ABSA would be the largest investment outside of the United
Kingdom for Barclays, and the largest single foreign
investment in South Africa since 1994.
5. (SBU) The press has suggested that Standard Chartered
(U.K.) or Hong Kong Shanghai Bank Corporation (HSBC) (U.K.)
might be rival bidders for ABSA, or might be interested in a
different South African bank -- but neither has publicly
indicated any such interest. In fact, Standard Chartered
flatly stated that it did not plan to place a competing bid
on ABSA. Industry insiders that we contacted see no
indication that either Standard Chartered or HBSC are serious
about a South African acquisition at this time.
The Road is Paved for Barclays
6. (U) The road is paved for approval of Barclays' bid.
Before going public, top executives from Barclays met with
President Mbeki to ask for his blessing. They assured him
that Barclays would live up to ABSA's black economic
empowerment commitments under the Financial Sector Charter,
and that Barclays was coming to South Africa for the long
haul. Satisfied with Barclays' good intentions, Mbeki
immediately trumpeted Barclays' move on ABSA as an indication
of strong foreign investor confidence in South Africa, and as
vindication that his macroeconomic stabilization and social
transformation policies were working. Publicly, Finance
Minster Manuel and SARB Governor Tito Mboweni have had
nothing negative to say about the deal, leading to the widely
held presumption that nothing is standing in the way.
What is Happening to the Four-Pillar Policy?
7. (U) Consolidation of the South African banking industry
during the past decade culminated in what is known as the
government's "four-pillar" policy, i.e., the government's
preference for keeping a minimum of four large banks
relatively competitive, healthy, and South African owned.
The big four are Standard Bank, FirstRand, Nedcor, and ABSA.
SARB Governor Mboweni recently reiterated the government's
"preference for the big four South African banks to remain in
South African hands," but had to admit that "nothing remains
stable." He confessed that the Treasury and the SARB would
have to consider modifying the policy at some point. Some
would argue that the policy lost its luster after Nedcor's
majority shareholder, Old Mutual, moved its primary stock
listing and headquarters to London from South Africa. Old
Mutual is an international financial services group with
strong South African roots (where it still derives most of
its income) that has maintained a secondary listing for
itself on the JSE Securities Exchange and a primary listing
for Nedcor. If there was any doubt before as to whether the
four-pillar policy was standing, Barclays' takeover of ABSA
should clear it up. The policy will have to change.
8. (SBU) The question is, "How much?" Given that two of the
four major retail banks in South Africa are foreign owned,
will the government close the door to future foreign
takeovers, or leave the door open? Industry insiders do not
think that the government will allow another foreign takeover
of a big bank after ABSA, but this may depend on how and why
Manuel chooses to approve the Barclays deal. We will be
watching to see whether he leaves the door open for other
foreign banks to compete in South Africa, and to bring more
capital to the country.
Some Reservations, but Industry is Supportive
9. (U) Media reports suggested that Barclays would have an
unfair competitive advantage in South Africa if no other
foreign banks were allowed in, but most banking industry
officials do not seem to be worried. Indeed, stock prices in
all banks got a shot in the arm on news of Barclays' bid.
Many in the private sector are hopeful that increased
competition among the big four will bring down the high cost
of local banking and make the whole economy a bit more
competitive. Currently, South African banks derive about
half their income from banking fees, far more than in more
developed markets. The acquisition is also seen as good for
South Africa, as it encourages more foreign investment.
10. (SBU) A U.S. bank executive held reservations about
whether it was a good idea for Barclays to leak news of the
deal so soon. ABSA shares have been increasing in value ever
since and this only made the deal more expensive. The
executive also questioned the logic of buying a South African
bank at a time when the rand was overvalued. The rand has
appreciated 16% against the British pound and 25% against the
U.S. dollar since January 2003. However, this may not be the
issue it appears to be. SARB Governor Mboweni recently
suggested that Barclays might not need many British pounds to
purchase ABSA. He pointed out that the actual foreign
exchange inflow "might be disappointing" because Barclays
could finance much of the purchase through rand holdings that
it has accumulated over time. This would take pressure off
the SARB to "mop up" excess foreign exchange in an effort to
keep the rand from appreciating further.
What Will Happen to ABSA and its Employees?
11. (U) Some local labor and political organizations voiced
reservations about job cuts after mergers and the potential
of capital leaving the country, but neither of these events
is likely to happen in the case of ABSA. ABSA's CEO, Steve
Booysen, stated publicly that the deal was "about growth and
leadership, not retrenchment" or capital leaving the country.
He pointed out that there was little overlap between ABSA's
and Barclays' Africa business )- with the only overlap in
the areas of corporate and investment banking in South
Africa, Tanzania, and Zimbabwe. A Banking Council official
echoed this sentiment, noting that the acquisition was more a
transfer of ownership than a merger. Moreover, Barclays has
a small number of employees in South Africa, making the
likely solution to any redundancies the shifting of employees
to other areas.
12. (U) In 1986, Barclays disinvested from South Africa,
leaving behind what later became First National Bank, now
owned by FirstRand Limited. Barclays returned in 1995 as a
much smaller entity, focusing on corporate and investment
banking, and on wealth management. Barclays now has 400
employees in South Africa, compared to 6,900 in all of
Africa. At this time, no one knows whether Barclays will
retain the ABSA brand in South Africa, where it is well known
on the retail level. ABSA, with Afrikaner roots, is the
largest retail bank in South Africa, employing 32,000.
Barclays is well known internationally and is locally strong
in corporate banking and credit cards.
13. (SBU) It is difficult for South Africans to argue against
Barclays' acquisition of ABSA, as it has Mbeki's blessing and
represents a very large, high profile foreign investment for
the country -- increasingly important to a government that
wants to grow the economy and reduce high unemployment.
Whether it brings more competition to the banking sector and
along with it lower banking fees is another question. The
private sector would like to see that happen, but is not
convinced that Barclays will not simply join the clubby
profitability of the big four. For its part, the government
would like to see banking services more affordable, both for
economic competitiveness reasons and to make services more
accessible to the large "unbanked" population in South
Africa. Other unanswered questions concerning the
acquisition revolve around what Barclays will do with the
ABSA brand, and how the government might modify its
four-pillar policy. Will Barclays' purchase of ABSA open or
close the door for future foreign acquisitions of South