Magic carpet ride?

Shaun le Roux at Alphen Asset Management says that a few cups of apple tea later, all the carpets in the shop are strewn on the floor before you are being offered "once in a lifetime" deals only because the salesman likes your face, knows you come from Af

Only the toughest of the tough get around Turkey without buying a carpet and the nagging thought after your purchase is: did I get a bargain? Sure as eggs you will find out you paid at least twice as much as you needed to.

I reckon Barclays Bank, in their purchase of a majority stake in Absa, feel like they've just visited a Turkish carpet shop. At R82.50, they think they've got a good deal, but they are very aware that the price was under R40 nineteen months ago, and their worries are compounded by the fact that this carpet looks very like the one they themselves sold twenty years previously!

The Barclays / Absa deal, as the biggest foreign investment in South Africa ever, is a significant transaction for a country starved of meaningful foreign direct investment (FDI).

There are two very important sides to this deal. Firstly, Barclays find Absa an attractive target, and secondly, foreign investors view South Africa as a country worthy of such a large investment. In order to attract FDI, a country needs to offer the prospect of long-term growth within a framework of stability, regulation and security.

Hats off to the government for going some way to creating an environment which is significantly more FDI-friendly, as we all know how important FDI is for the long-term economic growth prospects of a country.

It is reasonable to assume that Barclays will not be the last multi-national to make a sizeable investment in South Africa. The attractiveness of Absa itself, speaks as much about the superior growth prospects in emerging markets relative to ex-growth developed markets, as it does about the strong positioning of Absa within a fast growing local sector.

The transaction has other implications for our market.

Firstly, the cash that will be returned to investors (R30 billion plus) needs to find a home, and a good proportion will find its way back into the stock market. The largest sellers, Sanlam and Remgro, are likely to deploy their proceeds in one or two strategic acquisitions or else return the cash to shareholders.

The new look Absa will be a sexier, better balanced entity. It will have access to Barclays' cheaper funding, experience and best practices. After injecting Barclays' African assets and superior corporate banking expertise the bank will have less of a one-dimensional retail offering.

There may also be some cost synergies that can be extracted. Don't expect bank charges to come down in a rush - Absa's position as one quarter of the cosy cartel in SA is one of their most attractive features.

However, over the long term, competition in the banking sector will intensify and Barclays will provide Absa with an opportunity to lead the way in reducing transaction costs.

If the deal is approved, which is basically a foregone conclusion, Absa shareholders will be forced to part with 32% of their holding. Thereafter, they can elect to sell a further 28%. We think long-term investors will be well advised to hold onto their Absa shares as we like the prospects for the company over the long run.