HSBC Ends Talks to Acquire Nedbank, Old Mutual Says

HSBC Holdings Plc abandoned a bid to buy a $7.3 billion controlling stake in South Africa’s Nedbank Group Ltd., less than three weeks after Europe’s largest bank replaced its chairman and chief executive officer.

The London-based lender had been in talks for eight weeks to buy as much as 70 percent of Nedbank, including a 52 percent stake owned by Old Mutual Plc, Africa’s biggest insurer. HSBC didn’t say why the talks broke down in a statement today.

HSBC sought to acquire Nedbank, South Africa’s fourth- largest lender, to help it expand in emerging markets and profit from trade flows in Africa. Since the talks began on Aug. 23, HSBC replaced CEO Michael Geoghegan and Chairman Stephen Green. Banks are also under growing pressure to hold more capital than the minimum international regulators agreed in Basel last month.

“They took another look at Nedbank now that Geoghegan’s gone, and thought that $7 billion was rather expensive,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA with a neutral rating on HSBC. “There can be no doubt that HSBC is concerned about capital and that will have played a part in this decision.”

Nedbank fell 6.1 percent to 137.8 rand at the close of Johannesburg trading, its biggest drop since March last year. HSBC dropped 1.7 percent to 653.3 pence at the London close, while Old Mutual slid 4.8 percent to 138.3 pence.

Capital Erosion

The Nedbank acquisition would have reduced HSBC’s Core Tier 1 capital ratio, a measure of financial strength, to about 9.4 percent by the end of 2011 from 10 percent, Wheeler said. Regulators may require U.K. banks to have a minimum of 10 percent, more than the 7 percent threshold of the Basel capital agreements, according to Arturo de Frias, a London-based analyst at Evolution Securities Ltd. in London.

“HSBC remains committed to the South African market and to growing its business in South Africa,” HSBC said in its statement. HSBC’s decision is “more of a statement about HSBC than about Nedbank,” Old Mutual spokesman Patrick Bowes said.

“We have no feel for the reasons for HSBC’s withdrawal,” Nedbank Chief Executive Officer Mike Brown said by telephone. “We had no indication that anything was off-track during the due diligence.”

South Africa’s banking regulator said he hadn’t objected to the proposals when he held preliminary talks with HSBC and Old Mutual about the bid.

“Nothing has come to my attention that changes my view on the soundness of Nedbank or the South African banking system,” Errol Kruger, South Africa’s registrar of banks, said by telephone today.

Standard Chartered Bid?

Nedbank’s credit losses shrank in the first half after the South African government cut interest rates, allowing customers to repay debts. The lender’s credit loss ratio declined to 1.46 percent from 1.6 percent a year earlier. Loans and advances grew 4.9 percent in the six months to June from December.

“Nedbank is now for sale to the highest bidder” and the breakdown in talks “clears the way” for HSBC’s competitor Standard Chartered Plc to make an offer for Nedbank, Chris Gilmour, a Johannesburg-based analyst at Absa Investments, said.

The London-based lender had discussions with Nedbank earlier this year, according to Brown. Standard Chartered said this week it plans to raise 3.3 billion pounds ($5.2 billion) in a rights offering to bolster capital, not finance takeovers.

“This is not a war chest for acquisitions,” CEO Peter Sands, 48, told reporters on an Oct. 13 conference call. “This is a strategy primarily for organic growth.” A spokesman for Standard Chartered today reiterated that comment.

Barclays’s Absa

HSBC’s U.K. rival, Barclays Plc, bought a controlling stake in Absa Group Ltd., South Africa’s largest retail bank, for $4.48 billion in 2005, promising the two would expand in Africa under Absa’s banner. Five years later, after spending the equivalent of half of Namibia’s gross domestic product to buy control of Absa, profit from the unit has dwindled.

Old Mutual is seeking to repay 1.5 billion pounds of debt by 2012 by selling assets. The insurer agreed in August to sell its U.S. life insurance unit to Harbinger Capital Partners, the hedge fund run by billionaire Philip Falcone, for $350 million.

“Old Mutual will still be able to pay down its debts without selling Nedbank,” Gilmour said.

HSBC, which already has operations in Egypt and Nigeria, is being advised by Lazard Ltd. Old Mutual is being advised by Lexicon Partners, Rothschild and Bank of America Corp., while Nedbank is being advised by Credit Suisse Group AG.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Renee Bonorchis in Johannesburg at rbonorchis@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

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