The bye-bye blues: Looking at Barclays disinvestment

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(Bloomberg)
(Bloomberg)

The news this week that UK banking giant Barclays will cut its interests in South Africa marks the first time since 2004 that a major foreign investor in banking and financial services has decided to disinvest. Anglo sold its last stake in FirstRand 12 years ago.

Over the past three years, the major disinvestments and changes to local asset ownership belonged to the mining and commodities sector: BHP Billiton, Anglo American, Anglo American Platinum and Gold Fields.

Barclays’ decision to “sell down” its 62.3% in Barclays Africa over the next two to three years is the largest pull-out by a foreign multinational from South Africa in recent times.

The global bank, which owns assets in South Africa and 11 other African countries, is retreating from South Africa partly because regulators in developed markets are forcing global banks to pull out of emerging markets.

The other reason is that it is making losses and needs to focus its portfolio to provide the best return to shareholders.

Barclays’ 2005 investment in Absa – R33 billion for 55% – was an unprecedented chunk of foreign direct investment.

It was surpassed in size only by the Industrial and Commercial Bank of China’s R36.7 billion acquisition of 20% in Standard Bank in 2007.

Ramos intent on damage control

Barclays Africa CEO Maria Ramos spent the week trying to reassure investors that the sell-down had nothing to do with Barclays Africa’s own prospects – about 80% of Barclays Africa’s earnings come from South Africa.

Ramos emphasised that Barclays was pulling out because the regulatory burden outweighed the benefits.

Chris Steward, portfolio manager and banking analyst at Investec Asset Management, said the increased cost of adhering to international regulations was a key reason Barclays was selling its stake in Barclays Africa.

“There has been a substantial increase in the cost of compliance for banks to adhere to regulations imposed by Basel III and there is a list as long as your arm of other regulations banks have to comply with.”

New regulations had also forced banks to make use of more costly funding structures to adhere to capital requirements, he said.

Other factors include a forecast that local growth was expected to fall below 1% this year, the ongoing volatility at the finance ministry and a looming local credit rating downgrade that would hurt the banking sector especially.

Treasury and the SA Reserve Bank this week promised to take up the “unintended consequences” of bank regulations with
the Group of 20.

Exchange rate blues

It doesn’t help Barclays that the rand has tanked to the extent that the positive performance of the African subsidiary in rands last year translated into a much poorer performance in pounds: the rand fell 28% against the British currency during 2015.

Much of that was due to the dismissal of Finance Minister Nhlanhla Nene, just as Barclays’ new CEO, Jes Staley, was taking over the reins in London.

Investec’s Steward said: “Barclays has to hold a substantial amount of capital to cover Barclays Africa, over and above the capital that Barclays Africa holds already.

“Barclays is deemed responsible for 100% of the risk-weighted asset of Barclays Africa, but it only shares in 62.5% of the profit.”

In addition, UK bank regulators also impose a bank levy on Barclays based on its consolidated liabilities, which include those of Barclays Africa.

Steward said this massively diluted the return on equity Barclays could get on its investment in Barclays Africa, a problem compounded further by the weakening rand.

He said this regulatory burden, associated with owning a majority stake in Barclays Africa, also ruled out the other 30 globally important banks as potential buyers, because they too would be forced to comply with the same regulations.

Steward said this would make it difficult to find a buyer for the stake, even without taking any local South African factors into consideration.

Selling down their stake to 20% in Barclays Africa would take away the regulatory burden imposed by UK regulators, but would leave both Barclays and any potential buyers holding a minority stakes in the company.

There is a lot of uncertainty about who could buy Barclays’ stake in Barclays Africa.

The Public Investment Corporation (PIC), which manages government employee pensions, has a 5% stake in Barclays Africa.

Potential buyers raise their heads

When asked if he would increase his stake, the PIC’s CEO, Daniel Matjila, said he was “not in a position to comment”.

“Barclays has not provided full details of its disposal process.”

There is speculation that former Barclays boss Robert Diamonds’ African banking investment vehicle, Atlas Mara, may be interested, while there has also been speculation that Remgro might be eyeing a stake in Barclays Africa too.

The Financial Times this week reported that Diamond was approaching investors to back a takeover bid for Barclays Africa.

Diamond could face competition for Barclays Africa’s non-South African assets from China’s Industrial and Commercial Bank or France’s Societe Generale, the Financial Times added.

Barclays is moving amid the flux in the overwhelmingly London-based ownership of the mining and commodities industry, where commodity prices have dropped sharply.

This has caused the sector to focus on assets that will provide the highest return.

Anglo American, in a fight for survival and to raise cash to cut its debt, has embarked on a major restructuring: it plans to sell on its local coal, iron ore and manganese interests.

Last year, BHP Billiton exited the country when it put all its South African interests into a new company called South32.

Before that, in 2013, Gold Fields spun off three of its key South African gold mines into Sibanye Gold.

This was to reduce its reliance on local labour.

However, this proved to be a foolish decision as Sibanye is doing far better than Gold Fields.

Anglo Platinum is also paring back its local exposure and last year it sold its Rustenburg mines to Sibanye.

Oil major Chevron has announced that it will sell its 75% stake in its South African refinery and its Caltex petrol station network.

IN

MAJOR FOREIGN INVESTMENTS IN SA SINCE 1994

1. UK group Vodafone has been invested in the country since 1994. Vodafone initially held 50% of Vodacom, but has since increased that stake to 65%, which is worth R145 billion.

2. SBC Communications and Telekom Malaysia will pay $1.26 billion (R19.7 billion) for a combined 30% interest in Telkom.

3. In 2005, Barclays bought a 56% stake in Absa for $5.5 billion and has since raised that stake to 62.3%.

4. In October 2007, the Industrial and Commercial Bank of China acquired a stake of about 20% in Standard Bank for $5.5 billion.

5. In October 2010, HSBC ended talks to buy an $8 billion majority stake in Nedbank. HSBC has been in negotiations with Old Mutual to buy up to a 70% stake in Nedbank.

6. In November 2010, Walmart, the American multinational retail corporation, made a bid to acquire a majority shareholding (51%) in Massmart for $2.54 billion.

7. In 2015, Anheuser-Busch InBev agreed to buy SABMiller in a $108 billion takeover. The deal is still waiting for regulatory approval.




OUT

MAJOR RECENT DIVESTMENTS IN SA

1. Anglo American has been reducing its assets held in South Africa since the 1990s. However, according to Anglo’s latest restructuring plans, which were announced last month, it will sell all its local coal mines, its stake in manganese producer Samancor and exit its stake in Kumba Iron Ore.

2. Anglo American Platinum is paring down and selling its local mines, and last year sold its Rustenburg mines to Sibanye Gold.

3. Last year, BHP Billiton exited South Africa completely when it unbundled all its local mines into South32.

4. Gold Fields in 2013 reduced its exposure to South Africa by unbundling its Kloof, Driefontein and Beatrix gold mines into Sibanye Gold.

5. Chevron is looking at exiting South Africa, and Zurich Insurance is reviewing its assets in South Africa.


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