Marc Ashton

What about a tie-up between African Bank Investments Limited (Abil) and embattled Blue Financial Services (BFS)?

I ran this by a couple of analysts this morning and there didn't seem to be too much appetite for the idea, but here is my thinking.

1. Absa has indicated that it wants to get rid of these legacy stakes and it’s prepared to take bottom dollar for the shares, if one looks at what it did with the Pinnacle Point stake.

I did a few sums and if Absa was prepared to sell its 39% stake in Pinnacle for just under 3c a share and applies the same valuation principle, it would accept a price of R62m or 10c a share for Absa's BFS stake. If it can convince investment banking group Mellon to part for roughly the same valuation, it would get around 36% of the stock at more than a 66% discount to the present listed price.

Not feasible, you might say, but Blue is not going anywhere in the short term and unless drastic action is taken it may just sink under its bad debt weight. Do you really want to be holding 20% of nothing?

For argument’s sake, let's call it R200m round for a 51% stake in Blue (possibly excluding other African operations). Considering that Abil has R4bn in cash in the bank, the amount is not too big to swallow.

By the way, if you read BFS’ last annual report, you will see that it attaches a value of R32m to its brand names and then roughly R27m to something it classifies as "customer relations". That second figure nearly doubled from 2008 and to 2009 – is that creative accounting?

On top of that, BFS has an aircraft on its books valued at R15m (depreciated from R16.9m) in the asset register - not too shabby for a business whose local operations are rumoured to be technically bankrupt. In fact, the asset register of Blue makes for fascinating reading:

R16m in buildings across the continent
R53m in furniture and fittings - how many chairs is that? (That was up from R21m in the year before)
R10m in motor vehicles - up from R6.7m the year before
R38.5m in IT equipment - from R14.9m the year before
R12m for computer software - from a carrying value of 0 the year before
R16.9m for an aircraft, which means that its plane is worth more than Blue's building assets?  

Maybe my R200m figure is too generous and, as was pointed out to me, more than 50% of Abil’s shareholder base is foreign, so maybe a share swap of BFS for Abil shares?

2. African Bank had 419 branches at the end of September 2009 and indicated it was looking to consolidate a few of these. In fact, 77 of its branches were closed over 2009. BFS has 170 branches in South Africa and there is probably a fair amount of overlap between these operations and those of Abil, meaning there is plenty of room for consolidation.

3. Converting BFS branches into Abil branches costs relatively little and while Abil has had its hands full trying to sort out its integration with Ellerines, integrating new microlending operations should be relatively painless.

The BFS gross advances book is around R710m at the end of last year, and the quality of the book has been called into question with bad debts on the up.

Cost of funding is critical to microlenders. If they cannot generate sufficient "fat" through cheap funding, they will find themselves under pressure any time the credit markets dry up.

According to Abil’s management, its average cost of funding is around 11.4% while BFS funding comes in at 10.4%. However, this is warped because it includes an amount R21m which is marked as "shareholder loans". Blue cannot possibly have a lower cost of funding, so let's assume that Abil could sweat more out of Blue’s assets for a relatively low change in risk profile.

In a recent research report, Deutsche Bank analysts were quite critical of Abil, in particular its fall-off in new business volumes. Their big bugbear is that Abils' growth prospects looked weak, and that it was battling to find volume and new business.

If Abil were to look at a tie-up with the BFS assets, it could deal with this issue and probably expand its retail footprint dirt cheap.

** The author holds shares in African Bank Investments Limited (Abil).