FirstRand’s R20bn UK deal gets thumbs-up
Aldermore shareholders vote yes, but that doesn’t mean it’s all sunshine and roses for Africa’s biggest bank
The blessing of the UK courts, and the regulatory green stamp, is all that stands between Africa’s largest bank by market value, the JSE-listed FirstRand, and popping the champagne cork on its biggest overseas foray — the R20bn takeover of British high-street bank Aldermore.
In recent days, more than 95% of Aldermore’s shareholders voted to accept FirstRand’s offer of 313p/share to buy the bank — more than the 75% needed. The next step is that the UK Prudential Regulation Authority, Financial Conduct Authority and the SA Reserve Bank must put their stamps of approval on the scheme.
It’s a big deal for FirstRand and will push its overseas profits from 5% to 12% of its total.
But some analysts are wary, particularly as it follows a string of disasters from SA-based firms going overseas to "diversify" their profits. The worst such deal was Brait’s takeover of UK high-street retailer New Look for R37bn in 2015. This ended in tears, with Brait writing down the entire business to zero this year.
However, FirstRand’s investors seem to believe the banking group’s takeover of Aldermore will be done far more judiciously. Since the deal was announced in October, the share price has gained 22% to R65.31 amid a wider resurgence of confidence in SA’s banks.
FirstRand CEO Johan Burger has been coy about his plans for Aldermore, apart from saying it will give FirstRand an opportunity to diversify the products and customers of its UK vehicle arm, MotoNovo. MotoNovo’s main business is to finance secondhand cars, but it has ambitious plans to provide personal loans and insurance. Aldermore’s expertise in the British small and medium-sized business sector, especially with mortgages, will help.
In the long run, the deal appears more beneficial for FirstRand’s MotoNovo than for Aldermore’s shareholders. So why did Aldermore’s investors sell?
"FirstRand’s offer of 313p represents a 22% premium to Aldermore’s closing price of 245p the day before both companies announced they were in talks," says Adrian Cloete, portfolio manager at PSG Wealth.
Cloete says Aldermore shareholders were faced with a choice: accept the 313p offer, or risk seeing the price fall. To shun FirstRand’s advances, Aldermore’s investors would have had to be "really excited" about the bank’s earnings prospects as a standalone company.
Aldermore was formed in 2009, when a former Barclays executive, backed by private equity group AnaCap, merged two smaller banks — Base Commercial Mortgages and Ruffler Bank. It listed on the London Stock Exchange in 2015.
Laurie Dippenaar, FirstRand’s outgoing chairman, told the Financial Mail recently that this is an "earnings-enhancing deal, [but] not a destiny-changing deal. It will create incremental value".
Still, analysts seem divided about whether the deal is positive for FirstRand over the long term. Ratings agency S&P Global Ratings flagged this deal specifically when it downgraded SA’s banks last month. But Samira Mensah, senior credit analyst at S&P, says: "The group has been operating with sufficient excess capital, and the offer does not undermine the group’s capital position, beyond the purchase price."
Mensah says FirstRand has a proven ability to generate earnings thanks to its diversified franchise — including a retail bank in First National Bank (FNB), the corporate and investment bank in RMB, vehicle financier WesBank and asset manager Ashburton.
The deal will come at a cost, though. Analysts at Bloomberg Intelligence say FirstRand’s core capital ratio — a measure of its equity, as a percentage of its risk-weighted assets — will drop by a hefty 260 basis points to 11.7% just from paying the R20bn.
"It would remain ahead of its regulatory requirement and internal targets, but surplus capital will be largely eliminated and dividend hikes delayed," say the analysts. "FirstRand will likely prioritise raising the size of its capital buffer organically before any further deals or boosting dividends."
But if the deal will be a strain, it won’t break the bank.
Cloete says FirstRand has always been strongly focused on shareholder returns, so it has been quite disciplined in approaching acquisitions. "FirstRand will only do an acquisition at a price that is value-enhancing to shareholders, and will not overpay just to get an acquisition done," he says.
In the past six months, FirstRand’s stock has rallied 37% — more than rivals Nedbank (21%) or Barclays Africa (up 32%), but behind Standard Bank (up 40%). However, its stock is more pricey than that of its competitors, indicating that its shareholders have higher expectations.