Absa and Sanlam have agreed to merge their investment businesses in a deal that is set to create a black-owned asset manager with more than R1-trillion in assets under management (AUM).
The agreement, which will put the entity in prime position to attract money from institutions that have come under pressure to allocate flows into black-owned companies, will see Absa merge its investment business with Sanlam Investment Holdings, in exchange for a 17.5% stake in the newly empowered asset manager.
The remaining 82.5% of Sanlam Investment Holdings, which is held by Sanlam and Patrice Motsepe’s African Rainbow Capital (ARC), will be diluted relative to their existing shareholdings and valuations. That implies Sanlam will be left with about 61.9%, while ARC will have about 20.6%.
The combined entity will remain a black-owned investment business with more than 51% of the shareholding in the hands of previously disadvantaged individuals once the empowerment credentials of Absa and Sanlam are factored in along with the ARC BEE shareholding.
"We wouldn’t have done the deal if that was not the case," Robert Roux, CEO of Sanlam Investment Group, told Business Day. "That was a big part of the attractiveness for all of us. The other big opportunity is that the business models of Absa Investments and Sanlam Investments are very complementary in terms of retail distribution. We think that by combining our efforts we can really make a big play into the retail market."
The deal will create a black-owned investment behemoth that will be among the largest players in a sector that is under pressure from the government to transform as it staves off increasing competition from passive index-tracking investment solutions.
SA’s biggest private sector money manager, Ninety One, which is also listed in London, had AUM of £130.9bn (R2.7-trillion) at the end of March. The trend globally has been towards mergers to create the necessary scale to make profit in the face of increased competition from cheaper passive funds.
"Without significant scale and transformation credentials, it’s difficult to compete effectively in the asset management sector in SA going forward," said Jason Quinn, interim CEO of Absa. "The transaction delivers improved scale, capabilities, customer propositions and transformation, all of which are essential to achieving growth."
Quinn said the merger should not be seen as "an exit" of Absa’s investment business but rather the ceding of ownership of a much smaller asset management player in exchange for a share in a far bigger business with greater capability and better empowerment credentials.
"I’m absolutely delighted to welcome Absa as shareholders in the new Sanlam Investments as they share our vision of creating a successful black-owned asset manager," said Sanlam CEO Paul Hanratty, adding that the merged entity would be known as Sanlam Investments.
"We would expect to be able to absorb all of the staff so we don’t foresee any real issues in terms of retrenchments."
As part of the merger, the two companies will enter into a 10-year distribution agreement that will see Sanlam Investments become the preferred provider of all investment products through certain Absa distribution channels.
No specific value for the agreement was disclosed.
The deal will also see Sanlam-owned Satrix, one of SA’s biggest providers of index trackers, acquire Absa’s non-commodity exchange traded funds.
Sanlam subsidiary Glacier will enter into an agreement to buy Absa’s linked investment service provider (LISP) business for R80m in cash and will become the preferred provider of such services for certain Absa intermediaries.
Absa’s LISP business has R66bn of AUM, so a successful transaction would give Glacier assets of about R350bn, making it the leading linked investment service provider in SA.
While Absa is expected to take up to 17.5% in Sanlam Investments once the transaction is concluded in the first half of 2022, the precise shareholding will be determined in relation to the values of Absa Investments and Sanlam Investment Holdings.
At the end of June, Absa Investments had assets under management of R238bn, while Sanlam Investment Holdings managed R879bn, meaning the combined businesses would oversee more than R1-trillion in assets. The deal would bring to fruition Sanlam’s long-standing ambition to create SA’s biggest black-owned asset manager.
"The scale that you create in the process gives you the opportunity to invest more in digital technology and that is what is required to stay competitive in the industry," said Roux.
A successful transaction would give Sanlam Investment Holdings and Glacier access to Absa’s distribution network, broadening their reach and creating a wider product set for clients. The distribution agreement will initially run for 10 years, though a review will take place three years after the transaction is concluded.
While the deal remains subject to regulatory approval, Hanratty said he did not foresee any concerns given the competitive nature of the industry.
The deal excludes Absa’s Prudential Money Market Fund, which will continue to be owned by the bank, though the management of its assets will transfer to Sanlam Investments. Roux said that in time ownership of the money market fund may transfer to Sanlam should the parties agree on a deal.
"In future there could be a further transaction on that," said Roux, adding that black empowerment was imperative for SA’s financial services sector.
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