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Nedbank Group keen to avoid Ecobank woes in NCBA buyout
Customers perform transactions on Nedbank automated teller machine (ATM) at the Trade Route Mall in Lenasia outside Johannesburg, South Africa on February 8, 2023.
South Africa’s Nedbank Group says it is applying the lessons learned from its failed investment in Ecobank Transnational Incorporated (ETI) to its purchase of a 66 percent stake in NCBA Group, including reduced use of cash to pay for the shares in the Kenyan bank.
Nedbank recently sold its 21.2 percent stake in Ecobank at a loss of 4.3 billion rand (Sh33.1 billion at current exchange rates) after the former associate—in which it had limited influence over strategic direction— faced multiple headwinds.
The challenges facing Ecobank include regulatory uncertainty and a potential increase in capital requirements, which limit dividend distributions.
Nedbank says NCBA offers a positive contrast to Ecobank, noting that the Kenyan bank is well capitalised, has a strong record of paying dividends and operates in markets with predictable regulations and attractive growth potential.
“The deal structure is also compelling as it keeps the majority of NCBA investors exposed to the combined Nedbank and NCBA business,” Nedbank’s Chief Executive Jason Quinn said of the NCBA deal in a recent market update.
“Following the lessons learned from the disappointing ETI experience, we’ve ensured that all of those learnings have been applied to the NCBA acquisition.”
The South African firm will spend a maximum of Sh31.6 billion in the cash component of the purchase of the controlling stake in the Nairobi Securities Exchange-listed firm.
It is also prepared to issue a maximum of 43.8 million of its shares to NCBA shareholders who will accept its offer in the cash-and-stock deal.
Nedbank says it faced the risk of incurring more losses if it had held on to its Ecobank position.
“Unfortunately, a minority stake limited our ability to drive strategic progress, and the quality of the associated accounted earnings stream was low and was not backed up by dividend flows from ETI,” Mr Quinn said.
He added that this increased “risks of continuing to hold on to the investment due to regulatory uncertainty and the probability of increasing capital requirements in certain jurisdictions would have resulted in a scenario where we would have had to inject additional capital to prevent shareholder dilution.”
Nedbank invested 6.3 billion rand (Sh48.5 billion) in Ecobank in 2014 but only managed to get 1.6 billion rand (Sh12.3 billion) when it recently exited the position.
After accounting for total dividends of 400 million rand (3.08 billion) over the investment lifetime, the South African firm saw its loss from the venture stand at 4.3 billion rand (Sh33.1 billion).
The multinational said its bid for NCBA marks a change in approach to acquisitions in Africa.
“This proposed transaction represents a significant strategic reset for Nedbank’s presence on the African continent with a renewed focus on the SADC and East Africa regions, driven through businesses under Nedbank Group’s direct ownership and control with high correlation between earnings and dividend accretion,” said Mr Quinn.
