US embassy cable - 04PRETORIA4582

UNCLAS SECTION 01 OF 03 PRETORIA 004582 
 
SIPDIS 
 
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. 
End Summary. 
 
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 
green light. 
 
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 
takes over. 
 
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. 
 
No Rivals 
--------- 
 
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. 
 
Comment 
------- 
 
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 
African banks? 
MILOVANOVIC