Industrial and Commercial Bank of China’s landmark 20% acquisition of Standard Bank for R36.7 billion ($5.5 billion) last October highlights China’s investment ambitions in Africa. The move is more than a clever cross-border equity investment and signals an expansion in the relationship between China and the continent.
To date, China has largely concentrated on oil-for-infrastructure deals at a governmental level in the continent. That makes this deal with Africa’s largest bank in terms of assets historic – it is the largest single foreign direct investment in the continent and the largest ever by a Chinese company.
“This gives Standard a great footing into Africa with ICBC’s strong client base,” says Robert Leith, chief executive of international corporate and investment banking at Standard Bank. “And ICBC benefits from our unrivalled knowledge and presence in 18 African markets.”
ICBC plans to capitalize on the strong commodities trade between the two countries, with Standard Bank providing expertise in foreign exchange, letters of credit and cash management among many others things. Such is the depth of Chinese penetration into African markets, Leith says, that “to be strong in Africa you need to have Chinese investment due to the large and growing trade and capital flows.”
Leith dismisses suggestions that the bank will fail to build businesses in China in its own right due to ICBC’s monopoly on client relationships. He says ICBC’s equity stake provides the basis for a partnership between the two institutions as and when the opportunities arise rather than as a mechanism to develop specific revenue-sharing schemes or to integrate its services under one umbrella.
“When we are involved with certain deals, ICBC will be our preferred partner and vice versa when it is appropriate. In addition, we will generate fees on a deal-by-deal basis. ICBC has such a large balance sheet and international operations themselves so Standard Bank is not trying to get a piece of this pie. This deal serves more as a way to give their Chinese corporate clients a useful base in Africa.”
“This investment goes some way in assuaging critics who claim China’s strategy is to launch a quick grab for Africa’s resources by providing cheap loans through its state development banks such as Export-Import Bank of China. Instead, it suggests China is seeking to deepen its relationship with the continent by investing in the continent’s most stable and sophisticated financial services group.”
ICBC bought R20.7 billion of Standard Bank’s existing stock at $104.58 per share, a 30% premium over the volume-weighted average 30 trading days before the deal’s announcement. It then bought R15.9 billion of new stock at R120.3 per share, which represented 11.11% of the South African bank’s existing share capital and 3.9% above the record share price before the purchase.
Analysts say the deal was very reasonable since ICBC paid 14.4 times Standard bank’s earnings, well below the 20.7 ratio for the MSCI index of emerging market financial stocks.