“No thanks!” – HSBC sensibly decides to withdraw from acquiring Nedbank

The past couple of months has ushered in a flurry of positive deal and investment activity on the African continent, notable among which are the proposed acquisition of South Africa’s Nedbank by HSBC and Massmart – also of South Africa – by Walmart. Many analysts and investment managers focused on Africa and other frontier markets hailed these moves as signs that the rest of the world has begun to see the light in the “dark continent”. Investment bankers have been quick to talk up these announcements as just the advance party in a wave of acquisitions of African assets in the coming years.

Many analysts surely would have regarded HSBC’s recent announcement that it is pulling off from the deal as a blow to the “rising Africa” theory. Well I think this may be a setback for Nedbank and Old Mutual (its parent company that really can use the extra cash to deleverage its balance sheet). I believe this deal is idiosyncratic and is not representative of the potentials for acquisitions and investments in Africa. When the proposed deal was announced, I kept on struggling to understand the strategic benefits of the deal and I could not find any that was very compelling. I understand HSBC’s rationale for seeking a foothold in Africa: the continent is growing fast, banking penetration is low and banks can still make decent money from boring stuff like taking cheap deposits and funds out at much higher interest rates. Western bankers will give an arm and a leg to achieve the sort of Net Interest Margins that African banks take for granted.

So what is my grouse with the deal? HSBC picked the wrong target to expand in Africa. Nedbank is not Standard Bank – the market leader in South Africa with a wide footprint across the continent, it is basically the 4th largest bank in a South African market dominated by 4 banks!!. It has very limited operations in the rest of Africa and its international operations are concentrated in a handful of small Southern African countries. It is practically absent from the other big sub-Saharan African economies of Nigeria, Ghana and Kenya (not to mention North Africa). I concede that there is a partnership with Ecobank Transnational, which has a wide banking network across much of Sub-Saharan Africa. However, I don’t believe alliances are the most cohesive forms of business combinations and they can be like mermaids: i.e. you get a fish when you need a human and you get a human when you need a fish. The Nedbank-Ecobank alliance will be more valuable - in my opinion - if it were a merger. It is therefore clear that Nedbank is not the best vehicle for a bank like HSBC to gain a continent-wide exposure to the African banking sector. If it did the deal it would have had to execute another major acquisition – maybe with Ecobank – or buy multiple banks across Africa. Which is frankly time consuming!

Which leads me to the ideal suitor for Nedbank. I believe the ideal candidate for the bank has to be a global bank with an existing network across Africa that it can integrate Nedbank into. The two banks that fit the bill are Barclays Bank and Standard Chartered Bank. However, Barclays already controls ABSA: one of the big 4 banks in South Africa and I am near certain that the South African authorities will be very reluctant to approve such a deal due to competition considerations. Which leaves Standard Chartered Bank, which has a formidable presence across Western and Eastern Africa. It has significant operations in fast growing economies such as Ghana, Nigeria and Kenya, however the missing piece in its strategy is a sizable operation in South Africa (the region’s largest economy). Acquiring Nedbank will complete the picture and open up hitherto unlocked cross-selling opportunities. However, the bank – which is currently in the middle of a cash call – has basically signified that it would not be bidding as it intends to use the rights issue proceeds to bolster capital ratios not fund acquisitions. This really puts Old Mutual in a bind and it may have to reevaluate its strategy. However, if Old Mutual and its advisers want to get paid anytime soon, they have to beat a path to Standard Chartered CEO Peter Sands’ door and fall at his knees, kiss a ring and do whatever it takes to get him and his board to make a good bid for Nedbank. I think that is the only game in town!

Mobilizing domestic financing for infrastructure – recent positive developments

The past few weeks have ushered in a flurry of announcements of various policies/initiatives aimed at improving the infrastructure situation in Nigeria, with electricity power reform always leading the discussions. The reactions trailing the government’s decision to effectively privatize the electricity power sector has largely being met with positive comments by both Nigerian and international analysts. A major concern that has however underlined these positive comments has been the nation’s ability to attract sufficient investor interest in the power sector. An initial estimate of US$10 Billion is currently being bandied around as being required in the power sector.

This will require a massive sales effort by the government, the privatization agencies and the Nigerian finance & investment community. A very common response to the financing question has been: “Foreign investors are interested”. While I believe that the Nigerian power sector – if properly structured – presents a compelling investment proposition, there are also potential limitations that may prevent the expected rush of foreign investors. Firstly, Nigeria is setting on a privatization program for its electric infrastructure at a time that major emerging market economies are launching programs of similar nature. Brazilian President Lula has announced a US$500 Billion infrastructure upgrade plan, an integral portion of which will utilize private funding. The Indian Government is also planning a multi-billion dollar transportation and electric power upgrad that is expected to require huge private investments in the near future. Therefore, a lot of the infrastructure funds and big firms will be concentrating on these markets and we would face an uphill task competing against these destinations. Secondly, Nigeria also has some way to go in proving its stability as an investment destination particularly with the upcoming elections.

Hence, it is clear that while we should work hard at getting foreign investors we should also be doing as much as we can to mobilize funds domestically. That is why I am quite happy at PENCOM’s – the national pensions regulator – proposal to allow Pension Funds in Nigeria to invest up to 20% of their assets into infrastructure projects and funds. Given the current estimate of pension assets size of N1.73 Trillion (US$ 11.5 Billion), this proposal may free up to US$2.3 Billion for investments in infrastructure. I believe the bulk of these infrastructure investments will be in the electricity sector. I think the proposal to allow Pension Fund Administrators to invest in assets such as Private Equity and infrastructure is a good one as I have long believed that the pension guidelines - as they are currently written – suffer from an illusion of safety. I believe a good national pension fund system should serve two goals: mobilize savings for developing the nation and provide good returns on pension contributions to ensure a decent nest egg for retirees. The very restricted nature of the previous guidelines have led – in my opinion – to distortions or overheating of certain market segments in the country. Pension funds’ constant purchases of Federal Government bonds once pushed the yield on the longest dated (i.e. 20 year) bonds to 8%, in a country with double digit short term inflation rates!!! Analysts also believe that pension funds’ purchases of subnational, state government debt may also spark a bubble in the primary markets for such instruments.

This is why the current proposals to enable Pension Funds invest in infrastructure and private equity should be a win-win for both pension fund contributors and the economy as a whole. Infrastructure and Private Equity investing – if properly managed – should lead to greater diversification and mitigate some of the concentration risks in most pension portfolios. It should also be beneficial to the economy as the country will be creating a domestic capital pool for some of the electric power privatizations and investments that should be coming on-stream in the next 1-3 years. In addition, allocations to private equity should also help catalyze the emergence of a domestic private equity and venture capital industry that will provide much needed funding to early stage ventures, Small & Medium Enterprises (SMEs) and larger pre-IPO companies.

However, while the motives seem honorable and the benefits seem clear we must be mindful of potential pitfalls, with a key pitfall being the dearth of project finance structuring competence among Nigerian financiers. PENCOM should work with key DFIs such as the IFC to build pension managers’ capacity to properly evaluate infrastructure projects as well as private equity and infrastructure funds. The regulator has taken a step in the right direction by mandating minimum standards for such funds and projects, but it will need to go further to encourage best practices and ensure that fund managers do not engage in a race to the bottom to see who can throw the most money at the worst deals. These are solid proposals but the regulators, fund managers and the broader financial industry should work together that the pension contributors and the economy reap the most benefit possible.