Minority shareholders of South Africa's Absa Group are likely to back a $2 billion stock issue to parent Barclays Plc this month, reckoning the prospect of more exposure to the African continent is a fair trade for diluting their stock.
Barclays had blocked ambitions by its subsidiary to spread further north, citing conflict of interests.
Now the two banks plan to merge the bulk of their African businesses outside of South Africa, with Barclays relinquishing direct control of eight of its operations on the continent in exchange for 129.5 million new shares in Absa.
The 18.3 billion rand deal ($2 billion) would increase Barclays' stake in Absa, South Africa's third-largest bank by market value, to 62.3 percent from 55.5 percent.
Some analysts think Absa's minority shareholders should grab the offer when they vote on it Feb. 25. Barclays will not vote as approval rests solely with minority owners.
"They shouldn't throw out the baby with the bath water in chasing less of a dilution of their stakes that they end up completely scuppering the deal," said Johann Scholtz, an analyst at Afrifocus Securities in Cape Town.
"It's a good deal for both parties and enhances Absa's growth prospects."
If the deal goes through, Absa will finally have a chance to expand in the increasingly competitive African banking market.
Absa has equity holdings in banks in Tanzania and Mozambique, a bancassurance operation in Botswana and representative offices in Namibia and Nigeria.
Barclays is proposing to place ownership of its businesses in lucrative markets such as Botswana, Ghana, Kenya and Mauritius under Absa's wing. Other operations in the deal are Seychelles, Tanzania, Uganda and Zambia.
Some analysts say minority shareholders are getting the short end of the stick because Absa has a healthy chunk of excess capital on its balance sheet.
The bank had a free cash flow - a measure of cash available after paying for capital expenditure - of 6 billion rand at the end of December 2011, according to Thomson Reuters data.
Minorities may want the deal redrawn to include a cash component, and if that is impossible, then for Absa to distribute the money in a special dividend when it announces its annual results on Feb. 12, analysts said.
Barclays is, however, unlikely to budge and allow its hold on the African assets to be watered down.
"Minority shareholders should sit tight and agree to the deal but I also understand where minorities are coming from, that they would like to see it structured with a little bit more cash," said one banking analyst who asked not to be identified.
State-owned Public Investment Corporation, which manages government employee pensions, is the largest minority shareholder with 9.3 percent, according to Thomson Reuters.
Old Mutual Investment Group has 3 percent. Others are Coronation Fund Managers, Sanlam Investment Management, Momentum Asset Management,Dimensional Fund Advisors, Stanlib Asset Management and Investec Asset Management. All have stakes ranging between 2.3 percent and 1.2 percent.
The deal offers considerable long-term prospects for Absa, and the bank would be better off spending its excess capital on building a business in Nigeria, the analyst added.
Bigger rivals such as Africa's biggest lender Standard Bank already has a foothold in Nigeria, Africa's most populous country. No. 2 bank FirstRand has a merchant banking business there and has plans for retail and commercial lending.
"Ultimately the deal is going to get done. Minorities realise that this is a very attractive asset that they are getting at a very fair value," the banking analyst said.
"Over time, either way the deal is structured, it's going to be very accretive to shareholders," the banking analyst said.