EDITORIAL: Barclays makes a graceful exit
While losing so large a foreign direct investor is not good for SA, the divestment could be good for the local banking group
After a rocky start in March 2016, when the UK banking group abruptly and unceremoniously announced its intention to dump its South African subsidiary, the divestment this time has been much smoother than anyone might have expected.
That’s good for confidence in Barclays/Absa and in SA’s banking sector generally. And while losing so large a foreign direct investor is not particularly good for SA, especially at a time when it is receiving little other foreign direct investment, the divestment could well be good — or at least not bad — for the local banking group.
On Thursday, the UK group revealed that it had placed 33.7% of its South African subsidiary’s shares in the market in a deal worth almost R38bn. It was a lot more than the 22% it had planned to place this time round, which means that instead of dragging on, the sell-down is now done and dusted — assuming all the regulatory clearances will be granted.
This week’s placing of shares in the market via an "accelerated bookbuild", or a kind of auction, comes after an earlier placement in which Barclays cut its stake to just over 50%. SA’s finance minister had to approve any deal that took the group’s stake below 50%, in terms of the agreement with banking regulators that Barclays signed a few years ago when it raised its stake to 62.3%.
The approval took a bit of time because of the change of finance minister, but the group moved fast once approval was granted. The building blocks were already in place after the UK and South African groups agreed on terms of separation in February. The UK group will pay about £765m to Barclays/Absa to fund the systems, marketing and other costs it will incur as it reshapes itself into an independent, self-standing group again.
The UK group is the one that has lost out: not only has it had to pay for the privilege of cutting its stake in the local group to the 15% it will end up with as a result of this week’s deal, but it was not able to sell its controlling stake at a premium. That’s because it went the route of selling the shares on the market to various investors through a bookbuild rather than selling to a new strategic shareholder.
Though a consortium of private equity players led by former Barclays CEO Bob Diamond sought to buy the stake in 2016, it was rebuffed for reasons that are unclear. Local regulators hinted they were not too happy with the idea.
The UK group and its shareholders will now have to see whether the costs of cutting their exposure to SA and Africa are outweighed by the benefits, which include cash from the sale as well as lower regulatory capital requirements.
The South African group will lose its international flavour. And there will undoubtedly be some disruption as it sets up new systems and disentangles brands and customers.
But the speedy sale of the Barclays/Absa shares in response to strong demand from investors is a good sign. It can breathe easier because there is no longer an overhang of shares in the market waiting to be sold. Arguably, too, its shareholder register might be more stable, with a more diverse group of investors — none of which has more than 15% — rather than a big controlling shareholder that could flee, just as Barclays has, when things get rough.
One big question is what role, if any, the Public Investment Corporation (PIC) will play. It was the lead buyer in this week’s bookbuild and its stake will increase to just below the 15% level at which it would have had to be approved by the banking regulator. The PIC holds similarly large stakes in some of SA’s other banking groups and it may not have particularly activist intentions at Barclays/Absa. But we will see.