Absa Group Ltd. investors, including Africa’s largest pension fund, are questioning the bank’s $2.1 billion all-share offer for Barclays Plc’s Africa assets, saying the lender should use its cash surplus to help finance the deal.
Absa agreed in December to issue 129.5 million shares to parent company Barclays as part of a plan to fold most of the London-based lender’s African operations into Absa. Absa will then be renamed Barclays Africa Group Ltd. and Barclays’s stake in the bank will rise to 62.3 percent from 55.5 percent now. Shareholders are set to vote on the deal on Feb. 25.
“The funding of the transaction could have been done via cash or a combination of cash and shares as the group is well endowed with capital,” Maqhawe Dlamini, general manager of equities at pension fund Public Investment Corp., said in an e- mailed response to questions. “This structuring involving cash would have served to limit the minorities’ dilution.”
The Pretoria-based fund is Absa’s largest shareholder after Barclays, with about 9.5 percent of the Johannesburg-based bank. It has more than 1 trillion rand ($112 billion) of assets under management
Absa, which had the highest total capital adequacy ratio of South Africa’s largest banks at the end of June according to Bloomberg calculations, may have as much as 10 billion rand of excess capital, according to Greg Saffy, a banking analyst at RMB Morgan Stanley. Absa’s high capital levels contributed to a drop in return on equity to 13.8 percent in June, from 16.6 percent in December 2011.
“The deal would have been more enhancing for shareholder returns if it had a cash component, especially given that Absa has the surplus cash,” Godwill Chahwahwa, a portfolio manager who helps oversee stakes in companies including Absa at Coronation Fund Managers in Cape Town, said in a phone interview on Feb. 4. “We are assessing the deal holistically. We will look to engage with management after results next week.”
Sanlam Ltd., an insurer with fund management units and also based in Cape Town, is in talks with Absa about the offer and wants it to consider using a mixture of cash and shares, a person familiar with the matter said, asking not to be identified as discussions are private.
A spokesman for Absa in Johannesburg, who asked not to be named under company policy, said the bank was in talks with shareholders on any points for clarification ahead of the vote and that there was no plan to change the terms.
The deal is beneficial for both sets of shareholders, according to a Barclays’ spokeswoman, who asked not to be named under corporate policy.
Absa rose 0.3 percent to 171.51 rand as of 2:56 p.m. in Johannesburg trading.
Absa and Barclays, seeking to boost profit by combining products and customer bases across a continent with faster growth rates than that of developed regions, need 50 percent plus one vote from investors for the deal to go ahead.
“Some people are saying they could have structured it with some cash,” Adrian Cloete, an Absa shareholder and equity analyst at Cadiz Asset Management, said. “Institutions are talking to the bank. From a strategic point of view the deal makes a lot of sense, but pricing is a different question.”
Absa is scheduled to announce full-year earnings on Feb. 12 and may use surplus cash to pay a special dividend if it doesn’t use the money in the Barclays transaction, according to five analysts surveyed by Bloomberg. The mean estimate for a special dividend was 7 rand with the highest estimate at 8.35 rand a share.
The bank is in a closed period and can’t comment on financial information, an Absa spokesman said.
“Any dividend declared now means 62.3 percent will go to Barclays for 2012,” Johny Lambridis, a portfolio manager at Cape Town-based Element Investment Managers said on Feb. 4. “There’s no way they can justify that when Barclays owned 55.5 percent last year.”
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