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April 29, 2008

Absa acquires stake in Woolworths

South Africas Absa has acquired a 50 percent plus one share stake in Woolworths Financial Services (WFS) as it looks to establish a consumer finance house approach to consumer banking. The bank, of which Barclays UK holds a 56 percent stake, will pay around ZAR875 million ($109.5 million) if the deal receives regulatory approval. It is also subject to a restructure of WFS to include all existing financial service products at Woolworths, a major food and clothing retailer.The deal gives Absa the ability to distribute cards at the point of purchase and increase its share of the consumer finance market. It should be able to generate extra revenue in the business by better using information on spending habits and upselling store card customers on to credit cards. It will also benefit from Barclays experience of the joint venture model in the UK.As of December 2007, Woolworths had financial services assets of ZAR5.559 billion. The WFS business, which has a credit account base of 1.6 million customers, includes store cards, personal loans and Visa credit cards, as well as insurance products. Absa already has plans to launch new financial products through Woolworths, including a premium Barclaycard offering, which it has a licence agreement to issue through its parent company, Barclays. Absa will provide the business with specialist financial services in an attempt to speed up growth and consider new funding arrangements. Its capabilities in funding, leading credit risk and customer value management, as well as its expertise in enhancing, were a factor in Woolworths decision to sell the financial services unit. The deal is expected to be completed in the third quarter of 2008.

By Verdict Staff

South Africa’s Absa has acquired a 50 percent plus one share stake in Woolworths Financial Services (WFS) as it looks to establish a “consumer finance house” approach to consumer banking. The bank, of which Barclays UK holds a 56 percent stake, will pay around ZAR875 million ($109.5 million) if the deal receives regulatory approval. It is also subject to a restructure of WFS to include all existing financial service products at Woolworths, a major food and clothing retailer.
The deal gives Absa the ability to distribute cards at the point of purchase and increase its share of the consumer finance market. It should be able to generate extra revenue in the business by better using information on spending habits and upselling store card customers on to credit cards. It will also benefit from Barclays’ experience of the joint venture model in the UK.
As of December 2007, Woolworths had financial services assets of ZAR5.559 billion. The WFS business, which has a credit account base of 1.6 million customers, includes store cards, personal loans and Visa credit cards, as well as insurance products. Absa already has plans to launch new financial products through Woolworths, including a premium Barclaycard offering, which it has a licence agreement to issue through its parent company, Barclays.
Absa will provide the business with specialist financial services in an attempt to speed up growth and consider new funding arrangements. Its capabilities in funding, leading credit risk and customer value management, as well as its expertise in enhancing, were a factor in Woolworth’s decision to sell the financial services unit. The deal is expected to be completed in the third quarter of 2008.
Doug Walker, Absa’s managing executive, head of cards, told CI: “We believe that this model, i.e. transactions between banks and retailers, will continue principally as a result of the increasing complexity in the regulatory environment and the level of expertise and skills required to successfully run a financial services business.”
“Banks are generally better placed to fulfil this role. This model allows retailers and banks to focus on their respective competencies. The banks further benefit from increased access to existing and new customers through the retail store distribution channels.”
Absa has been looking into establishing joint ventures with retailers for some time, a strategy most successfully demonstrated by BNP Paribas’ consumer finance subsidiary, Cetelem. It is an approach that is increasingly gaining currency in South Africa. Standard Bank partnered with Edcon, one of South Africa’s leading retailers, in 2005 and also works with another retailer, Foschini Group.
Magnus Matthewson, senior analyst at stockbrokers Hitchens, Harrison and Co, said: “I would say Absa has a competitive edge over other South African banks, which have been operating in a more insular market, because it’s owned by Barclays. It will have the experience of Barclaycard, which is important coming into something like this. Barclays have done a lot of white labelling in the past.”
“I think this is something we may see Absa do more of. The joint venture model has been common in the UK for some time; HSBC worked with Marks & Spencer, RBS with Tesco and Barclays with Nectar, the loyalty scheme. It’s a business model that has been developed and I would be surprised that having the skill set in one market, Barclays would not look to transfer it to another.”
African Bank’s takeover of furniture retailer Ellerines is another example of the shift towards bank/retailer partnerships, although it differs from the other deals because the bank acquired full control of the business.
CI sources in South Africa consider the move a major development – and top banks in the country and are understood to be monitoring the move closely. They are interested to see whether it is possible for a bank and a retailer to team up effectively, and whether there is value in the sum of the parts.

Breakdown of consumer banking activities by

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