Archive for the 'South Africa' Category
March 2nd, 2011 by Tom Minney
South Africa’s largest private equity company is transforming itself into a long-term investment holding company and aims to raise ZAR 6 billion ($857.7 million), according to a report on Bloomberg. Brait SA (www.brait.co.za), listed on the JSE Ltd stock exchange (www.jse.co.za), lists its business on its website as “is the raising and management of investment funds that are typically classified as Alternative Assets. The current product-set includes private equity funds, mezzanine debt funds and a range of hedge fund solutions. Additionally, Brait deploys its capital in proprietary investment programmes in these product areas. These investments are made predominantly in South Africa and its region. Investors include leading global and South African institutions.” Bloomberg says Brait manages over $800 mn in 4 funds.
Bloomberg reported a statement to the JSE today (2 March) that the money raised will be used to buy 24.6% of Pepkor Ltd, South Africa’s biggest clothes retailer, which has more than 2,800 outlets in 12 countries under the Pep, Ackermans and Best & Less brands and will use a special purpose vehicle to get exposure of another 10.3%. It will also buy 49.9% and lend R221.2 mn in shareholder loans to Premier Foods, maker of Blue Ribbon bread and Snowflake flour.
The news agency quotes Zaheer Joosub, an analyst at Citigroup Inc: “This is one of those investment opportunities that comes along once every 20 years. It’s a very prudent thing to do.”
Executive director John Gnodde will replace Chief Executive Officer Antony Ball. Christo Wiese chairman of Pepkor and Shoprite Holdings Ltd. will take an anchor shareholding – targeted at 33% – and will become non-executive director of Brait.
The new Brait shareholding is additional to the 20% of Pepkor held by Brait Fund III. The agency quotes Gnodde saying: “We are doing the deals to afford the market an opportunity, through Brait, to get exposure in good, cash companies.” He said the aim was to become a long-term investor. As a private equity firm, Brait would have looked for an exit after about 8 years.
According to a previous company announcement on 13 January, as reported on I-Net Bridge: “International investment group Brait S.A.,Societe Anonyme disclosed on Thursday that the company is considering a potential transaction that may involve a significant equity markets capital raising, the securing of an anchor shareholder, the acquisition of investment assets and an internal reorganisation in support of these steps. The group, that that manages alternative assets, with a focus on hedge funds and private equity, said in a cautionary that the potential transaction remains highly conditional and will require, inter alia, regulatory and shareholder approvals.”
Bloomberg says the offer will be 3 new Brait shares for every 1 held and will open on 15 April 15 and close on 27 May. Shareholders representing 57.41% of Brait’s issued share capital have signed commitments or irrevocable undertakings supporting the transaction.
February 15th, 2011 by Tom Minney
The main trading platform of the London Stock Exchange (www.londonstockexchange.com) was successfully switched from the previous system yesterday (14 Feb) to the Millennium Exchange computer system. Technology solutions provider Millennium IT’s systems are widely installed in African stock exchanges.
Africa’s biggest exchange, the JSE Ltd (www.jse.co.za), announced on 3 Feb that it had concluded a licensing agreement with MillenniumIT to move its equity market trading activity onto Millennium Exchange, with the move planned for the first half of 2012. The JSE said the move will make trading 400 times faster. The Namibian Stock Exchange (www.nsx.com.na) also uses the JSE’s systems and both had been using the LSE’s TradElect system.
LSE swaps to compete
The 14 Feb LSE swap is the largest part of the exchange’s IT project. The London bourse bought Sri Lanka’s Millennium IT company for $30 million in 2009, instead of spending on a software package.
According to the a report in Financial Times, this is part of moves by the LSE to regain its position as a leading global exchange. It will adopt a faster trading system to take on rivals, expand into derivatives and streamline its clearing business. Antoine Shagoury, chief information officer of LSE Group, told the FT: “This migration is a crucial step forward in our drive to offer best in class trading services and marks a key milestone in the introduction of tightly integrated transaction technology across our markets,” said
LSE chief executive Xavier Rolet said the Millennium Exchange system is one of the fastest in the world, and can execute trades in 124 microseconds. Speed is a key criterion for luring high-frequency traders. Proprietary traders had been taking market share for trading in UK equities to exchanges such as Chi-X Europe and BATS Europe, operated by US-based BATS Global Markets but the Millennium Exchange is said to be double the average of the fastest speeds on BATS Global system. It is also faster than Nasdaq OMX.
The news came a few days after the LSE announced plans to merge with Canada’s TMX Group, subject to shareholders’ and regulators’ approval. Both exchanges would aim to pool their specialist trading platforms and cut IT development costs, and it would create the world’s biggest exchange by number of listings.
The switchover was delayed from last November, after the LSE’s Turquoise “dark pool” trading system for pan-European equities went out of order and was shut down as it switched to Millennium Exchange. The LSE held back moving its bigger UK equities trading platform away from the previous TradElect system until early this year. The LSE admitted last month that the problem had been caused by “human error”.
The LSE will move other parts of its operations onto the Millennium platform in due course.
JSE takes control
The JSE announced it will relocate its trading system from London to Johannesburg, enhancing operational efficiencies and ensuring trading optimization for market participants. Leanne Parsons, JSE Chief Operating Officer and Head of the Equity Market said in a press release: “We are excited about working with MillenniumIT and providing benefits to our market using their technology solutions”.
She is confident that the adoption of the new trading system will increase the equity volumes traded on the JSE and therefore liquidity: “In our experience, whenever we take a step forward with our trading technology, trading volumes also follow. If we want to remain a world-class and relevant exchange in a highly competitive industry, we must remain abreast of technological advances.”
Parsons explained that one reason to relocate the trading engine to Johannesburg was for increased operational stability. Now the JSE will manage and operate the trading engine itself. Parsons adds that operational costs will remain roughly the same: “The handful of incidents that we have had requiring the equity market to be halted, with reputational impacts, have been related to our international connectivity links. By moving the engine to Johannesburg, we eliminate this problem and are able to offer our clients improved service availability and stability.”
The structure of the deal with Millennium IT allows the JSE to grow trading volumes aggressively without incrementally increasing trading software costs. It also offers benefits for the JSE and opens up a new potential revenue stream by offering JSE stockbroking members the option to co-locate their computer servers near an exchange’s matching engine to cut the time it takes for messages to be sent to and from the trading engine and reduce bandwidth required. Many exchanges worldwide currently earn revenue from renting out computer space in co-location centres.
Millennium IT widely used in Africa
MillenniumIT, which has over a decade of experience in building technology solutions for the capital markets, is headquartered in Colombo, Sri Lanka and is a wholly-owned subsidiary of the LSE Group. Millennium Exchange is the company’s flagship product used by 10 exchanges and other execution venues worldwide and is known for speed and scalability.
Tony Weeresinghe, CEO of MillenniumIT and Director of Global Development at the LSE Group said in a press release: “Millennium Exchange is a next-generation trading platform that offers ultra-fast order-processing capabilities, providing users with a trading experience that is amongst the fastest, most reliable and technologically advanced in the world.”
MillenniumIT has also supplied trading systems to the securities exchanges in Kenya, Mauritius, Tanzania and Zambia, and central depositories and settlement systems in Botswana, Ghana, Kenya, Tanzania, Uganda and Zambia, among others.
The dynamic Stock Exchange of Mauritius (www.stockexchangeofmauritius.com), among the continental leaders in IT, has long promoted MillenniumIT trading and central depository systems. In addition to powering its own markets, SEM has also advocated them on other projects in which it has been involved, such as a central African regional exchange (which did not end up using Millennium IT), also Nairobi, Dar es Salaam, Botswana, Lusaka and the Bank of Ghana CSD.
In particular, MillenniumIT’s Smart Order Router system could support the hub-and-spoke model that is adopted by the Committee of SADC Stock Exchanges. Preparations are done and this is ready to move fast once funding is approved. The model can allow exchanges to continue to regulate their brokers and other institutions, as orders can be routed through local broking houses.
MillenniumIT also won the project for linking the East African Securities Exchanges and helping solidify the East African common market for capital but this too is awaiting funding.
Jit Seneviratne, Head of Business Development, told AfricanCapitalMarketsNews: “MillenniumIT sees a major role for itself in integrating African capital markets and we will use our technology to facilitate this. It certainly helps that we are already powering several exchanges in Africa… We have already identified the manner in which the links can be done. The only challenge if at all, is not in the trading but the clearing and settlement of pan African securities, but we have a plan for this as well.”
January 18th, 2011 by Tom Minney
South Africa’s JSE Ltd (www.jse.co.za) traded 2.1 million commodity derivative contracts in 2010, up 12% on the previous year but still below the record 2.5 mn contracts traded in 2008. The JSE’s Commodity Derivatives market offers grain trading in white and yellow maize, soya, sorghum, wheat and sunflower seed. It also trades metals including gold, platinum, silver and copper and a crude-oil based derivative called the Western Texas Intermediate (WTI), reportedly the world’s most traded commodity.
White maize accounted for 46% of all grains traded on the JSE, wheat accounted for 27% and yellow maize 16%.
The JSE’s head of commodity derivatives, Rod Gravelet-Blondin, said in a press release today (18 Jan) that the local commodity derivatives market continues to attract new participants who aim to eliminate price risks in an increasingly volatile trading environment: “There is far greater understanding among farmers and millers of the uses of agricultural commodity derivatives as a tool to reduce price risk. Because we are a physical delivery market, farmers can lock in prices at the start of a growing season by taking out agricultural commodity derivatives, so that no matter what happens in the course of the year, they will be able to get their Safex price provided they deliver grain to the quantity and quality specified.”
In 2011, the JSE’s Commodity Derivatives market plans to consolidate and build. Gravelet-Blondin says: “That means encouraging new market participants, and continuing to educate people in the benefits and advantages of commodity derivatives.”
Farm productivity soaring in southern Africa
Production is soaring in South Africa and in neighbouring Zambia. South Africa’s maize crop was over 12 million tons in 2010, near a record and helped by relatively strong prices at the start of the growing season, above-average rainfall and better farming practices. Prices are down by about 30% from a year ago, with white maize for delivery in July 2011 now trading at about R1,400 a ton, unusually R80 less than yellow maize, traditionally lower priced and used for animal feed.
Gravelet-Blondin says this is due to: “..a large carry-over of white maize from the previous season, and export demand for South African maize is less buoyant due to improved yields coming out of countries like Zambia. Another factor contributing to the increase in size of the maize crop is the fact that we are now seeing yields of close to five tons per hectare, which is virtually double what we were seeing 10 or 15 years ago. This is due in part to biotechnology, but also to improved farming practices. South African commercial farmers are far more business-minded and professional than was the case 20 or 30 years ago.”
How commodity exchanges reduce risk
Safex was launched in 1995 to provide agricultural commodity derivatives trading as a mechanism to address price risk for producers and users. It started out offering grain futures contracts, but has since expanded its range of traded instruments. It is part of the evolution of risk control. Initially the government used to manage price risks for farmers and millers through price controls. When the market deregulated in the 1990s the price risk moved to farmers and users.
Grains trade on the basis of physical delivery meaning that any contract traded can result in physical delivery to a grain silo in South Africa. However, recently the JSE introduced cash-traded corn contracts, for which physical delivery is not required, which are based on prices set by the Chicago Board of Trade, part of the largest commodities trading market in the world. US corn contracts currently trade at a R450 premium to South African white maize, according to the JSE. These contracts are pure financial instruments which makes them appealing to a broader range of market participants.
Chris Sturgess, general manager at the JSE’s Commodity Derivatives market, says: “The price of South African maize is often correlated to the international prices set in Chicago. But South Africa maize prices fluctuate between import and export parity depending on whether there is a surplus or shortfall of maize. Many traders keep an eye on the spread between US corn prices and South African white maize and look for opportunities to profit from a widening or narrowing of this spread.”
The WTI oil contract can also help companies reduce their fossil fuel costs by buying WTI futures when prices are low. Should oil prices rise, companies will be able to offset higher fuel prices paid at the pump with profits made on the oil futures. WTI contracts on the JSE are traded in rand rather than US dollars, providing greater price transparency for local companies. Sturgess says: “This is something we are encouraging local companies with high fuel bills to explore… Companies can also reduce currency exposure through the JSE’s range of currency derivatives.”
Gravelet-Blondin says there is a greater level of sophistication among commodity derivatives traders seeking opportunities for hedging or profit. For example, it is possible to trade the difference between gold and platinum prices, on the basis that the two prices are correlated and any divergence in the spread provides an opportunity for profit.
December 31st, 2010 by Tom Minney
Foreign inflows into South African Government bonds denominated in Rand were R61 billion (US$9.2 bn), up from R26.5bn in 2009, according to figures from the JSE Ltd. (www.jse.co.za), which runs the country’s securities exchanges. Net international investment inflows into equities were R35.6 bn, down from a record R75.4 bn.
A report on Bloomberg news says it is the first time that inflows into bonds have been more than those into equities since 1994, when apartheid ended in South Africa. It was more than the net cumulative bond purchases of the previous 15 years.
Yields are more than double those on US Treasury bonds. Bloomberg quotes Leon Myburgh, a fixed-income strategist for sub-Saharan Africa at Citigroup’s Johannesburg office: “South African bonds offer some of the highest yields around. Slowing inflation and declining interest rates made them a very attractive investment.”
It has been a year of massive inflows into emerging markets bonds and debt denominated in local currencies, driven as investors searched for higher returns when interest rates in developed nations have been near zero. According to Bloomberg data, “the spread, or yield difference, between 10-year South African bonds and U.S. debt of similar maturity was last at 480 basis points (4.8%), from almost 535 (5.35%) at the start of the year”. Put simply, bond prices in secondary trading increase when interest yields fall.
Bloomberg quotes Jacques Theron, portfolio manager at Absa Asset Management Private Clients, as saying the inflows could continue in 2011. Because the benchmark South African interest rate is at 5.5% (November’s cut was the 3rd in 2010 and the 9th since December 2008) and inflation is near its 5-year low (averaging 3.5% in the 5 months including November), investors may believe that the SA Reserve Bank (central bank) could be one of the few that could cut interest rates further in 2011.
Bloomberg says the combination of low inflation and falling interest rates meant that the bonds returned on average more than 26% in US dollars in 2010, 3rd-best performer after Colombia and Indonesia based on available index data from JPMorgan Chase & Co. Equity investments in South Africa’s FTSE/JSE Africa All Share Index returned more than 29% in 2010, measured in US dollars. Stocks were boosted by takeovers, including US Wal-Mart Stores Inc. acquriing a controlling stake in Massmart Holdings Ltd., and Nippon Telegraph & Telephone Corp. purchasing Dimension Data Plc.
Net foreign inflows into SA bonds helped the Rand (ZAR) gain 42% against the dollar, making it the best-performing emerging market currency, over the year.
Trevor Barsdorf, an analyst at Econometrix Treasury Management, is quoted as praising prudent debt management. Finance Minister Pravin Gordhan said on 27 Oct. that the country will keep its budget deficit to 5.3% of gross domestic product (GDP), down from a February estimate of 6.2%, and aims to reach 3.2% by fiscal 2014. Greece’s fiscal deficit was 15.4% of GDP and Ireland’s 14.4% in 2009.
Prospects for 2011
On the contrarian note, Bloomberg cites Manik Narain, emerging-markets strategist at UBS AG in London. “The best of the inflows into South African bonds is behind us.” Inflation has bottomed and will begin to pick up. and it is possible SA could raise interest rates by 50 basis points in 2011, causing foreign purchases of bonds to slow, cutting the currency to an estimated R7.60=USD1.00 by the end of 2011.
However, most remain optimistic. ETM’s Barsdorf says it will strengthen to R6.00=$1 over the year and it could climb as far as R5.50=$1. That would push inflation to below the SARB’s target lower limit of 3% and the bank could cut interest rates by 50 to 100 basis points during 2011.
Werner Gey van Pittius of Investec Asset Management told Bloomberg there could be another $4 billion of foreign inflows into South African bonds in 2011 just from dedicated local-currency emerging-market debt funds: “I can’t see too many reasons not to be bullish on South African bonds. We can’t see an aggressive sell-off on the horizon, unless there’s a massive risk-aversion event.”
December 20th, 2010 by Tom Minney
Two African stock exchanges are among leaders in requesting companies to report on Environmental, Social and Governance (ESG) issues, including South Africa’s JSE Ltd (www.jse.co.za) which this year became the first exchange in the world to require listed companies to move towards integrated reporting which includes ESG reports along with profit figures, as reported on this blog in June. The Egyptian Exchange (www.egyptse.com), Brazil, China, Indonesia and Malaysia are other exchanges discussing with the United Nations Principles for Responsible Investment initiative (www.unpri.org) through its sustainable stock exchanges dialogue.
According to an article in the Financial Times (www.ft.com) today (20 Dec), many investors are still slow to understand how to value the ESG reporting companies are giving them. Both Unilever and Rio Tinto have complained that investors are still only interested in short-term performance. Investors’ reasons for not taking interest could include because their holdings are very short-term, because they only work quantitatively, or because they believe that ESG is about imposing one’s own politics on the investee company. The article quotes John Wilcox, of corporate governance consultancy Sodali (www.sodali.com), as saying: “In the US, in particular, ESG is very politicized. Wall Street is not that comfortable with non-numerical issues, so it tends to focus on the financial results. Because these are half-yearly or quarterly, it tends to reinforce short-termism. Yet long-term success is a function of many things that do not lend themselves to quantification such as culture, long-term planning, environmental and social responsibility, human rights and even human resources issues.”
In general, it is more visible when investors penalize companies for poor ESG, such as when Deepwater Horizon, a BP oil rig, exploded. Some investors in India’s mining group Vedanta have publicly sold out their shares over concerns about the company’s human rights record (see for instance this article in the Guardian newspaper).
Wilcox is quoted that it is the wrong question if investors ask whether good corporate governance increases economic performance: “The real question is: does poor performance on governance increase risk – and the answer is clearly yes.”
However, there are cases where good governance is rewarded by investors. The example given is Brazil’s Novo Mercado of the Bovespa exchange (www.bmfbovespa.com.br), which demands higher governance standards than the main market. Wilcox says “Companies voluntarily agreed to higher governance standards to list on a more exclusive exchange on the basis that this would attract more capital. It worked extraordinarily well and is the best example we have that good governance is equted with better performance – companies listed on the Novo Mercado have tended to outperform their peers.”
In addition to ESG reporting to investors, there is also a requirement to be accountable where companies are stepping up sustainable procurement policies – the article cites governments, Tesco and Wal-Mart as examples.
Stock exchange and fund management investors are starting to believe that if they take more notice of ESG reporting, they will have a better understanding of how the company is run. Some funds believe there is a way to quantify ESG and Risk reporting as a contributor to excess returns, future competitiveness and long-term increase in relative value.
November 5th, 2010 by Tom Minney
The London Stock Exchange (www.londonstockexchange.com) issued the following press release about its trading halt on Tuesday 2 November: “Investigations into this morning’s trading disruption on London Stock Exchange’s pan-European MTF (multi-lateral trading facility), Turquoise, have revealed that human error was to blame for the disruption that began at 08:23 a.m. this morning (sic). The issue was swiftly isolated, and normal trading resumed at 10:30 a.m. Preliminary investigations indicate that this human error may have occurred in suspicious circumstances. The LSEG take this matter very seriously and a full internal investigation has now begun. The relevant authorities have been informed.
“In light of this incident, coupled with necessary network upgrades to address ultra low latency and high flow inherent in the new platform, the Group has regrettably been forced to postpone its Main Market LSE technology migration for SETS. Given that December is an agreed change freeze period, the London Stock Exchange Group will work in partnership with customers to agree a date as early and practicably as possible in 2011 to reschedule the Main Market migration.”
This may give participants at the African Stock Exchanges Association conference in Livingstone, Zambia (10-12 November) something to talk about. According to reports an announcement was due later on 2 November about the LSE’s migration of its main trading platform, TradElect, to faster systems designed by Millennium IT (www.milleniumit.com), which the LSE acquired in 2009. Millennium IT is also a sponsor of the ASEA conference and has a key position on the agenda to speak on technology links to create more urgently-needed liquidity on African stock exchanges. MillenniumIT’s trading and central depository systems are already in use in many exchanges across Africa (see previous blog) and its influence is likely to grow.
Turquoise had gone live with the MillenniumIT trading system on 4 October and the LSE’s main platform was due to switch early in November 2010.
However, none of the sources quoted in a Financial Times article seem to think there is any problem with the LSE strategy to migrate to MillenniumIT’s modern multi-instrument trading systems. They note that the LSE needs modern high-speed trading systems to stay in competition for market share, including for European equities against competitors Chi-X, BATS Europe and NYSE’s Euronext – several intermediaries switched trades to these on Tuesday when Turquoise went down. Traders will need to be reassured about the LSE’s reliability and there are some questions about such a long delay in implementing the new system. It was also noted that many leading exchanges worldwide have been affected by tech problems and none has suffered lasting damage.
Another UK source reported on 4 November that an IT contractor with access to the LSE data centres has been suspended.
South Africa’s JSE, the Namibian Stock Exchange and Norway’s Oslo Bors are all exchanges which use TradElect because of links to the LSE, and could switch to MillenniumIT trading platforms in 2011.
October 17th, 2010 by Tom Minney
The African bond market continues to expand, with many countries raising money on world capital markets. They are taking advantage of low global interest rates and many investors turning to African debt, partly fuelled by better economic management in Africa. Yields are near zero in Europe, the U.S. and Japan, and investors are looking to new frontiers.
Africa has massive capital needs to fuel its anticipated long growth run. The temptations to rack up debt again remain. The World Bank estimates that Africa needs to spend $93 billion a year on power, transport and water projects over the next decade to lift growth in the world’s poorest continent.
Bloomberg news agency reports that Nigeria appointed Barclays Capital in October as an adviser for its planned $500 million Eurobond. Zambia plans to raise $1 billion on the back of a planned sovereign credit rating this year.
Other African nations are dusting off plans to sell Eurobonds – bonds issued in an international currency, not the local one – to international investors. Many plans had been shelved in the global financial crisis in late 2008.
Bloomberg quotes Tanzania’s Deputy Finance Minister Omar Yusuf Mzee as saying that Tanzania is returning to work on its bond plan after postponing a sale of $500 million of the securities in 2008.
Angola has been talking for some time about raising $1 billion – $2 bln through international bonds this year. It received a B+ credit rating from Standard & Poor’s and Fitch Ratings in May.
Kenya plans to wait on its planned $500 million sovereign bond as the global recovery is “still uncertain,” according to Geoffrey Mwau, economic secretary in the Finance Ministry reportedly in August.
Sudan is next year to seek investors from the Persian Gulf region for $300 million of Islamic bonds because U.S. economic sanctions have denied the country access to other international markets, central bank Governor Sabir Hassan told the agency in an interview in Khartoum on 6 Sept.
Economic growth for Africa is expected to be more than 5% a year, says Bloomberg, fuelled partly by investment from China and India and partly by its own growing consumer spending. Infrastructure to be upgraded includes obsolete road and rail networks and power generation, where may countries face more power shortages – Bloomberg says that a continent of 1 billion people that has electricity capacity equivalent to Spain.
Bloomberg cites Samir Gadio, an emerging- markets strategist in London at Standard Bank Group Ltd: “The timing is perfect. Global yields are extremely low and that’s pushed a lot of countries to tap international markets. We’ll see good demand for these bonds. There’s just so much excess liquidity across the globe.”
South Africa’s $2 billion bond maturing in March 2020, yielded 3.69% recently (on 11 October), 138 basis points lower than when the securities were sold in June, according to data compiled by Bloomberg. The yield on Ghana’s 8.5% dollar-denominated bonds, due October 2017, has fallen 239 basis points to 5.78% during 2010.
According to the report, David Damiba, managing director in London for Renaissance Asset Managers,says: “It’s a fantastic idea to diversify their sources of funding. It’s important that these countries would want a benchmark bond” so that other assets can be priced appropriately by investors.
Another proponent is Stuart Culverhouse, chief economist of London-based Exotix Ltd., which advises clients on investments in illiquid markets. “Africa is relatively new to investors. After the last 20 to 30 years of really bad news, the past 5 to 6 years have been generally positive. There’s a cash pile just waiting to be invested. African Eurobonds will definitely be well-received.”
Some economic fundamentals have improved in Ghana, Zambia, Nigeria, Tanzania and Uganda. Most of their foreign debt, totaling about $33 billion, was canceled by lenders such as the International Monetary Fund and the U.S. starting in 2000.
Nigeria’s sovereign debt was 15% of gross domestic product in 2009, according to data from the IMF. That compares with 115% in Greece, 77% in Portugal and 116% in Italy. The report cites the IMF’s April 2010 Regional Economic Outlook for Sub-Saharan Africa. as saying in 2009 government debt was 26% of GDP in Zambia, 37% in Tanzania and 60% in Ghana.
Eurobond sellers will have to rein in fiscal deficits and limit any shortfall in their current accounts, to show that they can repay the money.
“It puts the countries on their toes,” said Kofi Wampah, first deputy governor of the central bank of Ghana, which is considering selling its second security in international markets, speaking to Bloomberg in an interview from his office in Accra on 7 Oct: “You have to ensure that your fundamentals are always right.”
October 1st, 2010 by Tom Minney
The wave of mega acquisitions which has gained momentum in South Africa this year could only be the start of a takeover tsunami, as large companies start to include Africa in their global business visions. An excellent article on Bloomberg yesterday (www.bloomberg.com) also says that South Africa is likely to be the “head office” for a wave of takeovers.
Recent mega deals include a bid by Wal-Mart, the world’s largest retailer, to buy South Africa’s Massmart Holdings Ltd. for about $4.6 billion, which had a massive effect on the value of the rand, helping it push past R7=$1. Other recent bids include HSBC Holdings Plc which is in talks to buy a controlling stake in Nedbank Group Ltd. and a bid by Nippon Telegraph & Telephone Corp to buy Africa’s biggest technology company, Dimension Data Plc. Bloomberg says deals on the table at present are worth $15 bn.
Bloomberg reports “In the race for Africa, companies from the U.S., China, Japan and the U.K. are scrambling to buy the continent’s best assets, tapping into its growth potential and its 1 billion people in a world where returns from developed nations are faltering.”. It quotes David Shapiro, head of Sasfin Holdings Ltd.’s securities unit: “Wal-Mart’s offer is going to spark other interest.. Any deal is possible.”
If it there are takeovers elsewhere in Africa, Bloomberg feels that South Africa’s economic might, infrastructure and regulated financial markets give foreign companies the confidence to use it as a springboard into countries such as Kenya and Nigeria. Bloomberg quotes Shapiro saying that South Africa is like the “head office for the rest of Africa.. It’ll be a service centre” for expansion.
The top 10 future takeover targets in South Africa are listed as:
1. Bidvest Group Ltd: a top-quality holding company, which makes 57% of its revenue from southern Africa, owns businesses from auto dealerships to financial services. Bloomberg quotes Wayne McCurrie, of RMB Asset Management saying “Bidvest is a prime target for African growth,” and Simon Hudson-Peacock, head of specialist equities at Cape Town-based Cadiz Asset Management saying that it is a “great company with great assets,” and suggesting an Sysco Corp or similar to acquire Bidvest’s international food and catering assets.
2. Northam Platinum Ltd: Bloomberg says a Chinese company could bid for Northam to secure platinum supplies and quotes Sasfin’s Shapiro: “Its Booysendal mine is coming online soon and it could be a super asset,” adding that China may also buy coal mines in South Africa. In April it was reported that Kazakh metal producer, Eurasian Natural Resources Corp., had bought 12.2% of Northam from Mvelephanda Resources for R2.2 bn ($316 million at current prices).
3. Lonmin Plc: Resource firm Xstrata Plc already owns 25% and Hudson-Peacock of Cadiz was quoted as saying “may want to capitalize” on gains in Lonmin’s share price since it originally bought the stake, by selling the holding to another company.
4. Barloworld Ltd: the world’s largest fork-lift truck dealer; was founded in Durban more than 100 years ago and and sells machinery made by Caterpillar Inc. RMB’s McCurrie is quoted as describing it as “nicely exposed to Africa”.
5. Aspen Pharmacare Holdings Ltd: the southern hemisphere’s biggest generics drug-maker;
6. AECI Ltd: a chemicals company
7. Tiger Brands Ltd: a food distributor, failed in 2009 to buy its largest rival AVI Ltd and has been making acquisitions outside South Africa, but could be a “good play”, particularly for bulls of soft commodities, i.e. who think that, as people and countries get richer, they will spend more on food.
8. Blue Label Telecoms Ltd: The company describes itself as “a distributor of prepaid secure electronic tokens of value and transactional services within the global economies”.
9. Business Connexion Ltd: Telkom SA’s bid to take over this computer-services company was. blocked by regulators, may be attractive to a company like International Business Machines Corp.
The report adds that retailers Shoprite Holdings Ltd. and Pick n Pay Stores Ltd. could lure bids from Carrefour SA or Tesco Plc, according to Stephen Carrott, analyst at Macquarie Group Ltd. Shoprite has 124 supermarkets outside South Africa and plans to add another 20 in Nigeria over the next 2 years, is described as an “excellent” potential acquisition.
There have already been a few massive takeovers of companies expanding into Africa. One of the giant investments was when India’s Bharti Airtel Ltd. paid $9 bn to purchase the African assets of Kuwait’s Mobile Telecommunications Co., and gain access to 15 African markets. Previously it had failed in merger talks with MTN Group Ltd., the continent’s largest mobile-phone operator.
September 18th, 2010 by Tom Minney
South Africa is proposing amendments to the Income Tax Act to level the playing field between Islamic banks and conventional banking, although no date has been set for their implementation.
Business Day newspaper (www.businessday.co.za) quotes Amman Muhammad, MD for Absa Islamic Banking saying the new laws are to encourage foreign direct investment into SA. He says current tax laws prejudice Islamic finance and undermine SA’s financial role in non-western markets as a regional financial centre.
Countries such as UK, France and Hong Kong have changed their tax laws to make them compliant with Sharia law. In South Africa in 2004 and 2005 First National Bank and Absa introduced Sharia banking. Albaraka Bank and the Islamic Bank were the first Islamic banks to be granted a licence by the SA Reserve Bank (1980s) but the Islamic Bank was liquidated in the late 1990s due to allegations of reckless trading.
There are about 500 million Muslims in Africa, including just over 1 million South Africans (2% of the population).
According to the news report, Islamic finance forbids the paying and receiving of interest (riba), including investing in certain industries. Sharia law says interest-bearing transactions result in economic ills, such as unemployment and high inflation. Trading in derivatives and speculative investment also is forbidden, as Sharia law requires that all transactions be backed by tangible assets.
Mr Muhammad says the proposed laws could increase the tax base and bolster the country’s gross domestic product (GDP). The Banking Association of SA estimates that the “unbanked” in SA have put about R12bn (US$1.7 billion) “under mattresses”. The new laws could have a great effect if some of that money came back into that market, says Mr Muhammad. He believes many Muslims, due to the restrictions on Islamic banking, have had to keep their money at home.
The proposed amendments to the Income Tax Act take into account 3 different types of Islamic financing on which one can develop products.
1. Mudurabah, a form of deposit where the client invests with a bank and, the bank invests deposits in Sharia-compliant enterprises or products.
2. Murabaha, which is a mark-up financing transaction offered by a bank so that a client can obtain financing for various assets, such as property and equipment.
3. Diminishing musharaka, a partnership arrangement usually used for project financing.
Wouter Scholtz, a director for tax at audit, tax and advisory firm Mazars, told the Business Day, that the proposed tax laws adopt the principle of “substance over form” as the basis for the analysis and regulation of Sharia-based financial transactions. In terms of this, for tax purposes an amount will be taken to be interest if it replaces interest under conventional transactions. He acknowledged that the treatment of such a transaction might be construed as offensive, but it should be appreciated that if the amounts in question were not to be treated as interest, the client might be deprived of the right to claim a tax deduction, Mr Scholtz points out. Emil Brincker, a tax director at commercial law firm Cliffe Dekker Hofmeyr, says in Islamic law the time value of money is not recognised. It regards money as a measuring tool for value and not an asset, he says.
Mr Muhammad also hopes that the Government will issue a sovereign sukuk (Islamic bond), which has been done in some other African countries.
September 16th, 2010 by Tom Minney
South Africa is ranked 1st out of 139 countries for its regulation of securities exchanges, according to the latest World Economic Forum (www.weforum.org) Competiveness Report 2010-2011. Previously South Africa was 2nd but it has overtaken Sweden for the top position.
Russell Loubser, CEO of the Johannesburg Stock Exchange (JSE Ltd, www.jse.co.za), South Africa’s only securities exchange, commented in a press release: “We are very pleased with this achievement, which acknowledges the JSE’s record in terms of regulation and surveillance. This ranking also sends a very good message about investing in South Africa. It is a testament to the effective working relationship between the JSE and the Financial Services Board (FSB).”
A well-regulated securities exchange is especially important to international investors after the global financial crisis. Unlike many exchanges, the JSE did not ban short selling nor introduce circuit breakers during the crisis. The JSE is accountable to the FSB for the regulation of its markets, market integrity and investor protection. The two organisations work closely together on matters that could undermine investor confidence in South Africa.
The WEF Competiveness Report 2010-2011 was released on 9 September and ranks countries according to 12 pillars or sets of criteria, rating a country’s competiveness according to quality of infrastructure and institutions, efficiency, market sophistication as well as capacity for innovation. Regulation of securities exchanges falls under the 8th pillar, financial market development.
South Africa has an overall 9th place ranking worldwide in terms of financial market development. This set of criteria includes other rankings that show the efficiency of local financial markets: financing through the local equity market – 7th; availability of financial services – 7th; soundness of banks – 6th; and legal rights of investors – 6th.
JSE Limited is South Africa’s only full-service securities exchange. It connects buyers and sellers in 4 different financial markets: equities, equity derivatives, commodity derivatives and interest-rate products. It offers the investor a first-world trading environment, with world-class technology, surveillance and settlement in an emerging market context. It is amongst the top 20 largest equities exchanges in terms of market capitalisation in the world.