SOUTH AFRICA: BARCLAYS' FINAL OFFER FOR ABSA

UNCLAS SECTION 01 OF 03 PRETORIA 001959

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN EINV ECON SF UK
SUBJECT: SOUTH AFRICA: BARCLAYS' FINAL OFFER FOR ABSA

REF: 2004 PRETORIA 04582


1. (U) Summary. UK bank Barclays made its final offer for
South African bank ABSA on May 9. Barclays will pay R33
billion ($5.5 billion) in cash for a 60% stake. Barclays
expects to receive ABSA shareholder approval on June 13 and
to close on July 13. The South African Reserve Bank will
absorb much of the dollar flows emanating from the
acquisition in an effort to keep the rand from unduly
strengthening. South African Government (SAG) officials
would like to see retail banking fees come down as a result
of the acquisition, but are not convinced that they will.
The deal itself represents a shift in the SAG's "four-pillar"
policy of maintaining four large South African owned banks to
ensure a healthy, competitive sector. Finance Minister
Trevor Manuel clearly left the door open for other foreign
acquisitions of South African owned banks. The SAG hopes
that the deal will spurn greater foreign direct investor
interest in South Africa, as the acquisition is the largest
foreign direct investment in South African history. The
acquisition sets Barclays on a path to become Africa's
largest bank in terms of assets. End Summary.


Barclays Final Offer for ABSA
--------------


2. (U) On May 9, UK bank Barclays made its long-awaited final
offer for a 60% stake in ABSA, South Africa's fourth largest
bank. The total value of the cash deal is R33 billion ($5.5
million),a significant increase from R20 billion ($3.3
billion) for a 50.1% share offered eight months ago (reftel).
In the final stages of negotiations, Barclays agreed to
increase its offer to R82.50 per share ($13.75) and included
a special dividend of R2 per share ($0.33). The acquisition
will be the largest single foreign direct investment in South
African history.


3. (U) On May 8, Finance Minister Trevor Manuel gave his
blessings to the deal. At issue for him was whether "the
character of ABSA (would) remain in place." Barclays
promised Manuel that ABSA would: (1) maintain its primary
listing on the JSE Securities Exchange; (2) employ a South
African Chief Executive and South African majority of
executive management; (3) submit primary regulation of ABSA
to the South African Reserve Bank (SARB); and (4) meet or
exceed Black Economic Empowerment (BEE) stipulations in the
Financial Sector Charter. Barclays has already announced
that four executive directors would be drawn from ABSA
management while only one would be drawn from Barclays.
Barclays would also furnish two non-executive directors.

Deal Should Be Sealed in July
--------------


4. (U) The ABSA Board of Directors has stated that it will
recommend the deal to its shareholders on June 13. ABSA CEO
Steve Booysen and Barclays' Chief Executive of International
Retail and Commercial Banking David Roberts are confident
that they will have the 75% shareholder majority necessary to
approve the deal. Barclays already has written commitments
from 63% of ABSA's shareholders, including Sanlam, a large
South African financial services company, and Remgro, a South
African investment holding company. ABSA's BEE partner,
Batho Bonke, also supports the deal. If the transaction is
approved on June 13, a court hearing will be held on June 21
to sanction the deal. If all goes as well, Barclays will
acquire ABSA on July 13, 2005.


5. (U) The actual purchase will be carried out in two phases.
First, Barclays will buy 32% of ABSA's shares, mostly
through a direct purchase of Sanlam and Remgro's 28% combined
share holdings. Second, Barclays will offer to buy another
28% of outstanding shares from willing sellers. This will
give Barclays the 60% stake that it seeks. Thereafter,
Barclays will acquire shares on a pro-rata basis.

"Four-Pillar" Policy Wobbly, but Intact
--------------


6. (U) Manuel assured the South African public that the SAG's
"four-pillar" policy regarding the desired number of major
South African banks would remain intact. In the past, the
four-pillar policy was interpreted to mean that the SAG
wanted a minimum of four large South African owned banks.
ABSA is one of the big four. The others are Standard Bank,
FirstRand, and Nedcor. Manuel claims that ABSA having a
foreign majority shareholder will not affect the four pillar
policy, as there will still be at least four large, healthy,
and competitive banks subject to South African supervision
and regulation that serve the South African market.


7. (U) Significantly, Manuel left the door open for other
foreign takeovers of South African banks by saying that
future mergers or acquisitions would be judged "on a
case-by-case basis" and that "theoretically it (was) possible
to maintain the four pillars and for none of those to be
South African owned." He quickly added that it might not be
"advisable" to proceed with this theory. Nonetheless,
Manuel's statements would appear to pave the way for other,
similar acquisitions. Rumors are flying about Barclays' UK
rival Standard Chartered returning to the South African
market by acquiring Nedcor or First National Bank (FirstRand).

No Forex Disruption Anticipated
--------------


8. (U) South African manufacturers and mining companies
hemorrhaging from a strong rand have expressed some concern
along with unions, about the impact of the ABSA acquisition
on the rand. To minimize the foreign exchange impact of the
acquisition, the South African Reserve Bank (SARB) is working
with Barclays, ABSA, and Sanlam to absorb dollar proceeds of
the sale into the country's official reserves. As of April
30, official gross reserves totaled $16.0 billion. The SARB
has been accumulating reserves the past five quarters to
provide more import cover and thus stability to the value of
the rand. The ABSA acquisition promises to push gross
reserves near the $20 billion mark.

Barclays/ABSA's Pan-African Plans
--------------


9. (U) Barclays is the UK's third largest bank in terms of
assets and already has an extensive presence on the African
continent. Barclays' plan is to consolidate all of its
African operations under ABSA over the next two years.
Conversely, Barclays will likely absorb ABSA's limited
operations outside of Africa, which would include its U.S.,
European, and Asian wholesale banking outfits. With ABSA,
Barclays will have a presence in 15 African countries and be
well on its way to becoming Africa's largest bank, at least
in terms of assets. South African owned Standard Bank has a
presence in 17 African countries. Barclays supports ABSA's
plan buy one African bank every 12 to 18 months and ongoing
negotiations to buy banks in Nigeria and Zambia.


10. (U) The ABSA acquisition will be Barclays' largest
investment outside the United Kingdom. Barclays expects its
annual African revenue to increase from 3% to 15% by 2007,
and that in four years South Africa's contribution to
earnings will grow from a fifth to a third of worldwide
earnings. Barclays currently operates in 60 countries
worldwide.

Future Synergies, FDI, Jobs, and Competition
--------------


11. (U) Achieving Barclays/ABSA Synergies. Barclays expects
to spend R1.8 billion ($300 million) in the first three years
after acquisition to consolidate African operations under
ABSA. It wants the final entity to showcase ABSA's retail
banking strength and Barclays' "world-class" corporate
banking capability. After four years, Barclays expects to
make additional annual pre-tax profits of R1.4 billion ($230
million) from increased income and cost savings.


12. (U) Hopes For Increased FDI. The SAG believes that the
Barclays/ABSA deal will boost foreign confidence in the
economy and attract greater direct investment to South
Africa. South Africa wants additional investment to fuel
higher growth, but has trailed most of its emerging market
peers in this area. Both President Mbeki and Finance
Minister Manuel have highlighted the positive image that the
deal should relate to other foreign investors. The SAG
clearly would like to use this deal as a selling point to
attract more foreign direct investment.


13. (U) Minimal Job Loss. ABSA CEO Booysen told the press
that only 2% of ABSA's workers would be laid off as a result
of the acquisition. Barclays currently employs a staff of
just 400 in South Africa and its African business focuses on
corporate and investment banking. In contrast, ABSA's
strength is in its South African retail business. Limited
redundancies exist for the two banks in South Africa,
Tanzania, and Zimbabwe.


14. (U) Will added competition bring prices down? South
African Treasury officials told Econoff that they expected
that the acquisition would bring more competition to
corporate and investment banking in South Africa, but not
much more competition to retail banking where it was sorely
needed to bring down high fees. ABSA CEO Booysen seemed to
support this view when he told the press that he intended to
boost ABSA's corporate and investment banking presence in
South Africa. Nevertheless, some Barclays/ABSA's press
statements have mentioned the desire to improve customer
service, operational efficiencies, and expand the range of
products for ABSA's customers.

Comment
--------------


15. (SBU) The Barclay/ABSA deal has overwhelming approval
from the SAG as well as industry. The SAG is elated about
the one-off boost in FDI and possibilities for greater FDI in
future. South African officials and the banking public would
like to see greater competition on the retail side to bring
down high banking fees, but it seems unlikely that Barclays'
acquisition of ABSA will deliver this result. We believe
that the modification of the SAG's "four pillar" policy and
Manuel's willingness to entertain further acquisitions on a
case-by-case basis is sure to lead to rampant takeover talk
in this sector. Stay tuned.
MILOVANOVIC