This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 001959 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON SF UK
SUBJECT: SOUTH AFRICA: BARCLAYS' FINAL OFFER FOR ABSA 
 
REF: 2004 PRETORIA 04582 
 
¶1. (U) Summary. UK bank Barclays made its final offer for 
South African bank ABSA on May 9.  Barclays will pay R33 
billion ($5.5 billion) in cash for a 60% stake.  Barclays 
expects to receive ABSA shareholder approval on June 13 and 
to close on July 13.  The South African Reserve Bank will 
absorb much of the dollar flows emanating from the 
acquisition in an effort to keep the rand from unduly 
strengthening.  South African Government (SAG) officials 
would like to see retail banking fees come down as a result 
of the acquisition, but are not convinced that they will. 
The deal itself represents a shift in the SAG's "four-pillar" 
policy of maintaining four large South African owned banks to 
ensure a healthy, competitive sector.  Finance Minister 
Trevor Manuel clearly left the door open for other foreign 
acquisitions of South African owned banks.  The SAG hopes 
that the deal will spurn greater foreign direct investor 
interest in South Africa, as the acquisition is the largest 
foreign direct investment in South African history.  The 
acquisition sets Barclays on a path to become Africa's 
largest bank in terms of assets.  End Summary. 
 
 
Barclays Final Offer for ABSA 
----------------------------- 
 
¶2. (U) On May 9, UK bank Barclays made its long-awaited final 
offer for a 60% stake in ABSA, South Africa's fourth largest 
bank.  The total value of the cash deal is R33 billion ($5.5 
million), a significant increase from R20 billion ($3.3 
billion) for a 50.1% share offered eight months ago (reftel). 
 In the final stages of negotiations, Barclays agreed to 
increase its offer to R82.50 per share ($13.75) and included 
a special dividend of R2 per share ($0.33).  The acquisition 
will be the largest single foreign direct investment in South 
African history. 
 
¶3. (U) On May 8, Finance Minister Trevor Manuel gave his 
blessings to the deal.  At issue for him was whether "the 
character of ABSA (would) remain in place."  Barclays 
promised Manuel that ABSA would:  (1) maintain its primary 
listing on the JSE Securities Exchange; (2) employ a South 
African Chief Executive and South African majority of 
executive management; (3) submit primary regulation of ABSA 
to the South African Reserve Bank (SARB); and (4) meet or 
exceed Black Economic Empowerment (BEE) stipulations in the 
Financial Sector Charter.  Barclays has already announced 
that four executive directors would be drawn from ABSA 
management while only one would be drawn from Barclays. 
Barclays would also furnish two non-executive directors. 
 
Deal Should Be Sealed in July 
----------------------------- 
 
¶4. (U) The ABSA Board of Directors has stated that it will 
recommend the deal to its shareholders on June 13.  ABSA CEO 
Steve Booysen and Barclays' Chief Executive of International 
Retail and Commercial Banking David Roberts are confident 
that they will have the 75% shareholder majority necessary to 
approve the deal.  Barclays already has written commitments 
from 63% of ABSA's shareholders, including Sanlam, a large 
South African financial services company, and Remgro, a South 
African investment holding company.  ABSA's BEE partner, 
Batho Bonke, also supports the deal.  If the transaction is 
approved on June 13, a court hearing will be held on June 21 
to sanction the deal.  If all goes as well, Barclays will 
acquire ABSA on July 13, 2005. 
 
¶5. (U) The actual purchase will be carried out in two phases. 
 First, Barclays will buy 32% of ABSA's shares, mostly 
through a direct purchase of Sanlam and Remgro's 28% combined 
share holdings.  Second, Barclays will offer to buy another 
28% of outstanding shares from willing sellers.  This will 
give Barclays the 60% stake that it seeks.  Thereafter, 
Barclays will acquire shares on a pro-rata basis. 
 
"Four-Pillar" Policy Wobbly, but Intact 
--------------------------------------- 
 
¶6. (U) Manuel assured the South African public that the SAG's 
"four-pillar" policy regarding the desired number of major 
South African banks would remain intact.  In the past, the 
four-pillar policy was interpreted to mean that the SAG 
wanted a minimum of four large South African owned banks. 
ABSA is one of the big four.  The others are Standard Bank, 
FirstRand, and Nedcor.  Manuel claims that ABSA having a 
foreign majority shareholder will not affect the four pillar 
policy, as there will still be at least four large, healthy, 
and competitive banks subject to South African supervision 
and regulation that serve the South African market. 
 
¶7. (U) Significantly, Manuel left the door open for other 
foreign takeovers of South African banks by saying that 
future mergers or acquisitions would be judged "on a 
case-by-case basis" and that "theoretically it (was) possible 
to maintain the four pillars and for none of those to be 
South African owned."  He quickly added that it might not be 
"advisable" to proceed with this theory.  Nonetheless, 
Manuel's statements would appear to pave the way for other, 
similar acquisitions.  Rumors are flying about Barclays' UK 
rival Standard Chartered returning to the South African 
market by acquiring Nedcor or First National Bank (FirstRand). 
 
No Forex Disruption Anticipated 
------------------------------- 
 
¶8. (U) South African manufacturers and mining companies 
hemorrhaging from a strong rand have expressed some concern 
along with unions, about the impact of the ABSA acquisition 
on the rand.  To minimize the foreign exchange impact of the 
acquisition, the South African Reserve Bank (SARB) is working 
with Barclays, ABSA, and Sanlam to absorb dollar proceeds of 
the sale into the country's official reserves.  As of April 
30, official gross reserves totaled $16.0 billion.  The SARB 
has been accumulating reserves the past five quarters to 
provide more import cover and thus stability to the value of 
the rand.  The ABSA acquisition promises to push gross 
reserves near the $20 billion mark. 
 
Barclays/ABSA's Pan-African Plans 
--------------------------------- 
 
¶9. (U) Barclays is the UK's third largest bank in terms of 
assets and already has an extensive presence on the African 
continent.  Barclays' plan is to consolidate all of its 
African operations under ABSA over the next two years. 
Conversely, Barclays will likely absorb ABSA's limited 
operations outside of Africa, which would include its U.S., 
European, and Asian wholesale banking outfits.  With ABSA, 
Barclays will have a presence in 15 African countries and be 
well on its way to becoming Africa's largest bank, at least 
in terms of assets.  South African owned Standard Bank has a 
presence in 17 African countries.  Barclays supports ABSA's 
plan buy one African bank every 12 to 18 months and ongoing 
negotiations to buy banks in Nigeria and Zambia. 
 
¶10. (U) The ABSA acquisition will be Barclays' largest 
investment outside the United Kingdom.  Barclays expects its 
annual African revenue to increase from 3% to 15% by 2007, 
and that in four years South Africa's contribution to 
earnings will grow from a fifth to a third of worldwide 
earnings.  Barclays currently operates in 60 countries 
worldwide. 
 
Future Synergies, FDI, Jobs, and Competition 
-------------------------------------------- 
 
¶11. (U) Achieving Barclays/ABSA Synergies.  Barclays expects 
to spend R1.8 billion ($300 million) in the first three years 
after acquisition to consolidate African operations under 
ABSA.  It wants the final entity to showcase ABSA's retail 
banking strength and Barclays' "world-class" corporate 
banking capability.  After four years, Barclays expects to 
make additional annual pre-tax profits of R1.4 billion ($230 
million) from increased income and cost savings. 
 
¶12. (U) Hopes For Increased FDI.  The SAG believes that the 
Barclays/ABSA deal will boost foreign confidence in the 
economy and attract greater direct investment to South 
Africa.  South Africa wants additional investment to fuel 
higher growth, but has trailed most of its emerging market 
peers in this area.  Both President Mbeki and Finance 
Minister Manuel have highlighted the positive image that the 
deal should relate to other foreign investors.  The SAG 
clearly would like to use this deal as a selling point to 
attract more foreign direct investment. 
 
¶13. (U) Minimal Job Loss.  ABSA CEO Booysen told the press 
that only 2% of ABSA's workers would be laid off as a result 
of the acquisition.  Barclays currently employs a staff of 
just 400 in South Africa and its African business focuses on 
corporate and investment banking.  In contrast, ABSA's 
strength is in its South African retail business.  Limited 
redundancies exist for the two banks in South Africa, 
Tanzania, and Zimbabwe. 
 
¶14. (U) Will added competition bring prices down?  South 
African Treasury officials told Econoff that they expected 
that the acquisition would bring more competition to 
corporate and investment banking in South Africa, but not 
much more competition to retail banking where it was sorely 
needed to bring down high fees.  ABSA CEO Booysen seemed to 
support this view when he told the press that he intended to 
boost ABSA's corporate and investment banking presence in 
South Africa.  Nevertheless, some Barclays/ABSA's press 
statements have mentioned the desire to improve customer 
service, operational efficiencies, and expand the range of 
products for ABSA's customers. 
 
Comment 
------- 
 
¶15. (SBU) The Barclay/ABSA deal has overwhelming approval 
from the SAG as well as industry.  The SAG is elated about 
the one-off boost in FDI and possibilities for greater FDI in 
future.  South African officials and the banking public would 
like to see greater competition on the retail side to bring 
down high banking fees, but it seems unlikely that Barclays' 
acquisition of ABSA will deliver this result.  We believe 
that the modification of the SAG's "four pillar" policy and 
Manuel's willingness to entertain further acquisitions on a 
case-by-case basis is sure to lead to rampant takeover talk 
in this sector.  Stay tuned. 
MILOVANOVIC