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23 February 2017

Barclays seals divorce agreement with African subsidiary

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Barclays has reached an agreement with its African subsidiary about the details of their divorce, a key step before the British bank can sell more shares in its Johannesburg-listed offshoot.

Two people briefed on the matter said Barclays and its South African subsidiary were awaiting approval for the agreement from local regulators. Analysts have estimated that the deal setting out the terms for how the two will split could cost the British bank as much as £1bn.

Barclays Africa Group Limited (BAGL) depends on its UK parent for a range of services, including technology, branding, human resources, credit risk management, strategic development and operational management support.

To break the master services agreement that governs the provision of these services, Barclays is expected to pay a fee to its African subsidiary, in which its stake is worth R68bn (£4.16bn).

It also needs to negotiate a transitional services agreement, governing the services it will provide its subsidiary for an interim period, and have it approved by regulators, before it is allowed to cut its stake in BAGL below 50 per cent.

It is unclear whether Barclays will include the likely cost of the deal in its full-year results, which are due to be announced on Thursday. The bank declined to comment.

In May, Barclays sold the first chunk of its 62 per cent stake in its South African unit via a R13bn placing with institutional investors and now has just over 50 per cent.

Selling the African business is one of the biggest strategic decisions taken by Jes Staley since he took over as chief executive of Barclays in December 2015. Once the bank is allowed to deconsolidate the business by regulators it is expected to boost Barclays’ core capital buffers close to its 12.5 per cent target.

While its main South African retail bank operates under the ABSA brand, BAGL uses the Barclays brand in about 10 other countries, including Kenya, Ghana, Tanzania, Zambia, and Botswana. ABSA declined to comment.

Once the two split, BAGL is likely to be forced to stop using the Barclays brand, which is expected to be one of the biggest areas requiring compensation from the UK bank.

Having given itself until 2019 to complete the African sale, Barclays has expressed confidence that it could sell the rest of its shares on the open market if no strategic bidder materialised.

Former Barclays chief Bob Diamond was one of the potential bidders to have expressed an interest. However, talks with strategic bidders including Mr Diamond’s consortium are understood to have stalled. Barclays is expected to keep a 10 to 20 per cent stake.

Manus Costello, banks analyst at Autonomous, told clients in a note published last year: “We believe that Barclays will have to enter into a separation agreement with BAGL which might prove expensive.”

Extrapolating from the £210m of upfront costs for Lloyds Banking Group to spin-off its TSB unit in 2014, Mr Costello estimated Barclays could face separation costs of between £500m and £1bn.

In a circular to shareholders before last year’s annual meeting, Barclays said it would “need to co-operate with Barclays Africa to facilitate an orderly transition of the operational support and other services, including brand licensing and information technology support services”.

It warned that “this process could be more costly and time-consuming than anticipated”.

Barclays is expected to report annual pre-tax profits, excluding notable items, of almost £4bn when it presents its results on Thursday — down from £5.4bn the previous year — according to consensus analyst estimates.

 

Source: Financial Times UK

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