The proposed deal will create “sustainable growth and value for shareholders,” Standard Bank CEO Sim Tshabalala told a media briefing. Aligning the banking, insurance and asset management businesses of the two companies will create a whole which is “greater than the sum of its parts,” he said.
Standard Bank is taking the opportunity of Liberty’s low market valuation to try to extend its leading position in African financial services. Tshabalala sees a “massive opportunity” in insurance in the rest of Africa given low penetration rates of around 1%.
Giving Liberty’s insurance salesforce access to Standard Bank’s continent-wide banking presence will move beyond the companies’ existing “arm’s length” distribution agreement and lead to revenue growth, he said. “We want to enjoy the benefits of fully owning and fully integrating” Liberty’s insurance business.
The bank is offering 0.5 of its own shares plus cash of 14.40 rand for each Liberty share, while Liberty will also pay shareholders 11.10 rand in cash. In total that provides a 32.6% premium to the insurer’s July 14 closing price.
The proposed transaction “makes sense” for Standard Bank, says Dudu Tembo, portfolio manager at Argon Asset Management in Cape Town. “Standard Bank has, for some time, been referring to growing a fully integrated financial services offering. This will be facilitated by the buy-out.”
Tembo sees a range of potential benefits:
- There should be some synergies, for example in distribution.
- The transaction should enhance the ability for the group to develop and deliver integrated solutions for clients.
- It should bolster non-interest revenue in the group.
- It will also create an opportunity to enhance Standard Bank’s and Liberty’s pan-African aspirations.
Standard Bank has controlled Liberty since 1999 and currently has a stake of 54%. The deal will mean the delisting of Liberty from the Johannesburg Stock Exchange as it becomes a wholly-owned subsidiary. Liberty’s board will recommend the deal to shareholders.
It’s “a good offer to minorities,” Liberty CEO David Munro told the briefing. Liberty’s strategy won’t change, but growth will be achieved by cross-selling products between the two franchises, Munro said, adding that the synergies that will be achieved have yet to be quantified.
The takeover is subject to regulatory approval and the bank aims to finalise it in the first quarter of 2022. Standard Bank is being advised by Merrill Lynch while Liberty is being advised by Goldman Sachs.
“We view the transaction in a positive light as it removes overhang risks for both Standard Bank and Liberty”, says Radebe Sipamla, an investment analyst at Mergence Investment Managers in Johannesburg. This is due to the potential liquidity pressure emanating from Liberty’s relatively high exposure to commercial property that might have required Standard Bank to provide additional capital, he says.
- Standard Bank shareholders will acquire greater exposure to Liberty at an attractive valuation as Liberty trades at the lowest price to gross embedded value of about 0.5 times, versus Old Mutual on 0.6 times, Momentum on 0.7 times and Sanlam on 1, Sipamla adds.
“The transaction is underpinned by the rationale of synergies and efficiencies in asset management and insurance,” says Paul Hollingworth, banking expert at Creative Portfolios in London. “This cements and deepens a long-standing commercial bond into nuptials.”
Standard Bank and Liberty are in asset management through their Stanlib joint venture. Despite the large premium, the transaction takes Liberty’s valuation from a discount of around 20% to book value to a modest premium, so is “not too demanding,” Hollingworth says.
- Even though the premium relative to recent trading price looks high, it is still at a 30% discount to the last disclosed Group Equity Value (GEV) for Liberty, says Tembo at Argon.
- Still, she notes, the sector is facing uncertainty on the adequacy of pandemic-related provisions, which could result in a downward GEV revision.
- “Liberty has been trading at the lowest price relative to GEV in the listed sector. On that basis, the price seems fair.”
Standard Bank sees bancassurance as the path to a breakthrough in African insurance penetration.
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