Africa’s biggest bank by market value just became a possible takeover target – at a time when potential buyers are scarce.
Billionaire Johann Rupert’s Remgro Ltd and RMB Holdings Ltd are spinning off their stakes in Johannesburg-based FirstRand Ltd to achieve better value for their investment in the banking group.
Unbundling FirstRand means it no longer has a dominant holder and its securities are easier to trade.
“If you think of the size of FirstRand, for an international banking company to come in and spend that much money in South Africa is probably unfeasible at the moment,” said Adrian Cloete, a portfolio manager at PSG Wealth in Cape Town.
A buyer would also need to overcome antitrust obstacles and international capital requirements have made it harder for banks to hold investments abroad. A buyout would also be a tough sell to investors after nine years of plundering under former President Jacob Zuma’s administration.
Now, the state is in a debt trap, taxes have been raised, consumers are struggling and the economy hasn’t expanded more than two per cent annually since 2013.
Rewind to 2004 and the picture was very different. Bids for South African banks were lining up, the economy was headed for its fastest growth rate in almost a decade, and the government was posting surpluses and cutting taxes.
There are other factors at play too.
European lenders are focusing more on their home markets, with the likes of Deutsche Bank AG and Societe Generale SA shrinking their investment banks.
Depressed share prices are also dissuading companies such as Italy’s UniCredit SpA from participating in consolidation. The global financial crisis knocked deals, with HSBC Holdings Plc in 2010 ending talks with Nedbank Group Ltd; since spun out of insurer Old Mutual Ltd. Two years prior, Industrial & Commercial Bank of China Ltd. bought 20 per cent of Standard Bank Group Ltd. in what was then the biggest overseas purchase yet by a Chinese firm.
In 2005, Barclays Plc beat Standard Chartered Plc for Absa Group Ltd., only to surrender control in 2017.
Merger and acquisition activity across South African industries slumped to 5.4 billion rand ($366 million) in 2018, the lowest level in 15 years, with deal flow over the past few years mainly concentrated in local firms expanding their operations in countries such as the UK, Australia and India.
At the moment, FirstRand is an outperformer. It is the most profitable of its three biggest peers – Standard Bank, Absa and Nedbank – while its shares have also outperformed its rivals over the past five years, according to data compiled by Bloomberg.
Although at a price to book ratio of 2.7 times, it is also the most expensive relative to its peers.