Sanlam Investment Holdings’ (SIH) proposed acquisition of Absa’s investment management arm could value it at least about R700 million, which investors said was a “good deal” for Sanlam.
Absa Financial Services will exchange its entire interest in its investment businesses, excluding the Absa Prudential Money Market fund, for a shareholding of up to 17.5% in SIH.
In December last year, Patrice Motsepe’s African Rainbow Capital (ARC) Financial Services purchased a 25% stake in SIH for R817 million, which valued SIH at almost R3.3 billion.
“ARC got the stake on a time when valuations were depressed,” Warwick Bam, Avior Capital Markets’ head of research, said.
However, in Sanlam’s latest interim results, the group values SIH at R4 billion.
Old Mutual Investment Group (Omig) portfolio manager Neelash Hansjee and Sentio Capital portfolio manager Imtiaz Suliman used that figure to determine how the deal valued Absa’s investment management unit.
Assuming that Absa gains a 17.5% stake in SIH, the Absa investment management unit’s value is at least about R700 million.
Fairtree Asset Management portfolio manager Cornelius Zeeman said the deal valued SIH, including the Absa assets, at about R4.85 billion and so Absa investment management unit’s valuation should be about R850 million.
However, Avior’s Bam said another way of valuing the Absa unit was based on its annualised profit of R300 million, using a price-to-earnings ratio of 12. Those figures would value it at R3.6 billion.
The Sentio Sanlam Collective Investments General Equity fund has stakes in both Sanlam and Absa.
“The deal gives SIH access to Absa’s distribution model,” said Suliman. “It is a good deal for Sanlam in terms of the price paid, which is not excessive. From a price-to-AUM perspective, Sanlam values the asset management business at 50 basis points to AUM, and effectively they are paying 30 basis points for the Absa assets. The price is justified to some extent as Absa investment management has strong exposure to fixed income and money market products, which come at a lower margin,” Suliman added.
“From an Absa shareholder perspective, in the overall scheme of the bank, it is a tiny deal. This deal streamlines the group and gives its asset management unit a home,” Suliman said.
A black-owned asset manager
Sanlam CEO Paul Hanratty said the deal was about the amalgamation of the asset management businesses of Sanlam and Absa.
“Earlier this year, Sanlam announced a sale of its South African asset management business to ARC, creating South Africa’s leading black-owned asset manager with sufficient scale to be truly competitive,” he added.
Absa interim CEO Jason Quinn said that the transaction would unlock opportunities for the bank.
“It will mean that our investment unit will become part of one of the largest black-owned asset management companies in South Africa. Importantly, we believe the deal will enable us to offer a deeper and broader range of investment solutions to our clients,” he added.
“From an Absa point of view, the transaction delivers improved scale, customer propositions and transformation, all of which are essential to achieving growth,” Quinn said.
On competition authority approval for the deal, Hanratty said: “I believe this is an extremely competitive industry. If one looks at the facts about market shares and the level of competition in the industry, I do not believe this transaction should pose any significant concerns to the Competition Commission.”
On Absa’s strategy, Quinn said: “We are not exiting the investment management industry. We think the improved empowerment credentials are crucial for growth. Not an exit but an exchange for a bigger opportunity.”
On jobs after the deal’s conclusion, Hanratty said: “We will seek to place and utilise all the Absa investment professionals. Our business is growing strongly. Therefore, we would expect to absorb all the Absa staff.
“I think a transition like this is going to take quite a few years. We will ultimately combine our fund ranges. In terms of the branding, the business will be known as Sanlam Investments.”
Satrix and Absa Newsfunds
The proposed deal sees Satrix gaining 15 Absa Newsfunds exchanged-traded funds (ETFs), which hold R4.8 billion in assets. However, the bank will keep its three commodity funds, covering gold, platinum and palladium, with R27 billion in assets. Satrix currently has 22 ETFs, which have a market value of R32.4 billion, according to Satrix CIO Kingsley Williams.
Yusuf Wadee, Satrix’s head of exchange-traded products, told Citywire South Africa that the passive manager was excited about the deal. “The Absa Newsfunds, which has niche strategies, are certainly funds, mandates and indexes that Satrix does not track. So together, we will have a compelling offering,” he said.
Omig’s Hansjee said Absa was getting out of asset management from a control perspective but was getting a stake in a much larger asset manager, which showed the bank has recognised that asset management was a scale industry.
Denker Capital portfolio manager Kokkie Kooyman said that deal followed the trend of businesses focusing on what they are good at. Sanlam has a 49% stake in Denker.
“Absa has decided that it cannot grow its asset management business on its own. They believe they will do it better by taking a share and letting someone else, Sanlam, drive this.
“From Sanlam’s point of view, it is a no-brainer as they will eliminate a competitor. Consolidation of this scale is likely to help the industry’s big players. Consolidation is likely to take pressure off profit margins because there is less competition. I’m sure the opposition is going to be targeting Absa clients and staff,” Kooyman said.
“It is inevitable that some of Absa’s investment staff will leave. Sanlam will favour the people they know. The deal is interesting, and it is BEE driven. It points to Absa wanting to focus on its banking and other financial services and outsourcing wealth management.”
Avior’s Bam said that the transaction was “fairly attractive” for Sanlam, given the inclusion of the distribution deal.
“I don’t understand Absa’s perspective. It would seem that asset management is an important component for other banks. Absa will walk away from an important component of their client value proposition.”
Bam said the deal was likely to result in further margin pressure for the smaller asset management players.
This article was first published on Citywire South Africa here, and republished with permission.