A major empowerment deal announced by Absa on Tuesday means that the banking group will meet the Financial Sector Charter target of 10% direct black ownership.
Chief executive Nallie Bosman also believes the transaction places Absa on a firm footing for ongoing transformation of the group — one of South Africa’s so-called “big four” banking groups.
“It will support our growth going forward, and although the financial benefits emanating from this initiative are currently difficult to quantify, we expect them to be significant. We are already seeing how new entrants into the financial services market value our brand,” Bosman says.
He says the deal, which will actually see more than 10% of Absa’s ownership directly held by black shareholders, represents a major step in the group’s drive to meet Financial Sector Charter targets well ahead of time.
For example, by the end of 2008, one out of three board members will have to be black, with a minimum of 11% black women. Black representation on the board, he pointed out, will be 28%, with 6% of them black women — four years before the target date.
The group also points out that it has an indirect black shareholding of between 12% and 14%. With the latest deal, it means that Absa substantially complies with the overall ownership requirement of 25%.
“Our country’s economic prosperity depends on the participation of black South Africans, and we at Absa are committed to that,” says board chairperson Danie Cronjé. “This transaction adds a sound commercial impetus for ongoing growth, to the benefit of all current and future shareholders.”
The proposal, which still has to be approved by the company’s shareholders, involves Batho Bonke, a broad-based black economic empowerment grouping, led by Tokyo Sexwale, subscribing for 10% of an enlarged share capital of Absa.
The grouping will also get two board positions at Absa.
Batho Bonke was put together by a three-member team — Tokyo Sexwale, Leslie Maasdorp and Nthobi Angel. Says Sexwale, Batho Bonke chairperson and Absa board member: “The grouping includes empowerment companies with a large base and represents a countrywide spectrum.
“Absa is the leader in retail banking in South Africa, with the widest footprint,” Sexwale says.
He adds: “The transaction presents an opportunity to secure a material interest in Absa, with critical mass and scale. And as an anchor shareholder in Absa, we also have the ability to contribute to increasing shareholder value.”
The deal involves Absa creating 73,2-million new redeemable preference shares, issued at R2 each to the new company — Batho Bonke — created for this purpose. This company is owned by the empowerment groups.
In addition, Absa is using the opportunity to broaden the shareholder base amongst its own staff, and up to 7,3-million preference shares (1% of share capital) are being created for this purpose, bringing the total number of new shares to 80,5-million.
Add the new shares for the black economic empowerment (BEE) grouping and the Absa staff and the total increases from 651-million to 731,5-million issued shares. The 73,2-million new BEE shares have the same rights as existing shares and therefore the deal turns the grouping into 10% owners of Absa.
Each redeemable preference share will come with an option to convert it to an ordinary Absa share and at R2 a share, the initial price tag will be R161-million.
The options give holders the right to replace their redeemable preference shares with ordinary Absa shares during a two-year period that will begin three years after the issue date. That will give them up to five years to raise the funding needed to pay the option strike price.
However, using an option valuation formula, Absa has attributed a value of R10,67 to every option, meaning a total value of R858,6-million for all the options. This comes to 2,8% of Absa’s market capitalisation of R30,8-billion — calculated at a share price of R47,31 for Absa’s R651-million ordinary shares currently in issue.
Strike prices will be calculated according to a formula based on the Absa share price at the time. This means that existing shareholders will bear some cost for this progressive move. However, Absa believes that the dilution will be acceptable, particularly in light of the benefits of embarking on this empowerment route.
Says Cronjé: “The group earns in excess of 90% of its earnings in South Africa and has to position itself to be relevant to this market.”
The transaction will enhance Absa’s business and its brand, believes Bosman.
“It significantly broadens the base of our board and our shareholders, which has to result in a further broadening of our customer base. Given our standing as the most admired financial services brand, this initiative should make us the empowerment bank of choice.” — I-Net Bridge