Why HSBC Dumped Nedbank

In the last issue of African Banker, Tom Nevin reported that the tie-up of South Africa’s Nedbank and HSBC was all done bar the shouting. Shortly after, the affair was off, leaving everybody to wonder why HSBC had left Nedbank standing at the altar.

The investment deal that hit the ground with a resounding thump in South Africa’s year-end financial sector was the sudden dumping of Nedbank by giant suitor HSBC, the world’s biggest bank by assets. Old Mutual insurance, Nedbank’s parent, said after negotiations were abruptly broken off just days after they started, that it was as much in the dark as the rest of the market.

The deal had been especially comfortable for Old Mutual because it had been trying to hive off its 53% stake in the small but often profitable retail bank for a couple of years, saying publicly it wanted to return unencumbered to its insurance roots. So when HSBC came courting with a reported $8bn offer, it was a willing-seller match made in heaven. The willing-buyer aspect fell apart when HSBC suddenly lost interest.

The rumour mill hit top speed and reasons for the split abounded, ranging from post-World Cup blues, political intrigue, looming nationalisation of everything, to South African banks’ fee-based income structure that, for many outsiders, seems unsustainable.

On the announcement of the breakdown, Old Mutual weighed in rapidly with damage control.

“Right now we’re thinking of what is the appropriate option for us. We’re not in any rush to do anything,” said Julian Roberts, Old Mutual’s CEO, at the presentation of the group’s third-quarter interim management statement.

He added that he was unhappy that the deal did not go through, but Old Mutual would continue to support 53%-held Nedbank and its management.

Nedbank chief executive Mike Brown says he was disappointed by HSBC’s pull-out because he considered the global bank could accelerate Nedbank’s future strategy.

“The reasons for HSBC’s withdrawal were not disclosed to Old Mutual,” he said, “but they were not, as far as Old Mutual is aware, related to any adverse findings during HSBC’s due diligence.” He concluded by saying: “We are where we are. They have pulled out.

Speculation was rife

Chairman of Omega Investment Research, former diplomat Denis Worrall, comments that HSBC’s expression of interest in Nedbank “was very correctly seen in South Africa as a major development and positive expression of interest in the country. The South African media, and probably Old Mutual and Nedbank themselves, played up the possible deal. And because of this, HSBC’s decision to end discussions was so much more disappointing to the South African institutions and South Africans generally.”

It was the lack of explanation of why negotiations were cut so sharply and suddenly that sparked speculation in the financial districts. HSBC finally gave a terse statement to the effect that “Nedbank had simply not met HSBC’s strict acquisition criteria”. It was anyone’s guess what those criteria actually are, and the announcement did little to quieten the debate.

Investment Solutions’ economist Chris Hart laid some of the blame at the door of South Africa’s financial policies, as did Business Day newspaper, which editorialised: “If you were HSBC, you would have been astounded at the speed with which the atmosphere soured here after the World Cup. They were considering spending upwards of $5bn and it seems to us that it would be more than naive to assume that politics did not play a part in persuading them to go away.

“The ANC and its leader need to understand that money doesn’t grow on trees. If we cannot make investors safe as we did visitors to the World Cup, they simply won’t come here.

“You cannot have a ruling party threatening to nationalise huge businesses and expect business to carry on as usual. South Africa is going to become just too much bother.”

Rigardt Maartens, a portfolio manager at PSG Konsult, says now that HSBC has exited the scene, another possible suitor is Standard Chartered. “It has the balance sheet to do the transaction,” he observes.

Other candidates do not come quickly to mind in light of banks struggling with high debt. For example, South Africa’s biggest bank, Standard, is cutting expenses by laying off some 1,200 staff and cutting its multimillion-rand sports sponsorships.

Head of corporate communications at Stanchart Tim Baxter pours cold water on speculation that it is considering a buyout of Nedbank. “Organic growth remains our core strategy,” he insists.