When pessimists warned that South Africa’s largest companies would leave the country when Nelson Mandela came to power a decade ago, they weren’t completely wrong.
Some of the biggest companies have indeed left. Metals and mining group Billiton did so in 1997, moving its primary listing to London. It was followed by Anglo American, the mining leader, and South African Breweries (SAB). Then there was Old Mutual, the biggest life assurer, after its demutualization. These, along with two smaller companies, accounted for 15% of the market capitalization of the Johannesburg stock exchange and 7% of GDP. That is a huge shift.
But while the moves were certainly controversial – the trade unions, for instance, attacked evil white capitalists for scuttling off with their ill-gotten gains – that doesn’t mean the pessimists were right. Corporate emigration has for the most part been beneficial to both South Africa and the companies involved.
Outward push after apartheid It was inevitable that South Africa’s largest businesses would internationalize when the country’s isolation ended. Firms started sloughing off the large non-core holdings they had built up for lack of an alternative during the apartheid years. And given their huge domestic market shares (SAB, for example, had a dizzying 98% of the beer market) the only place to reinvest profits was abroad.
Emigration was simply a corollary of this policy. The emigrants left South Africa because they felt that they needed access to global skills and capital in order to be able to compete internationally. South Africa’s pools of management and savings were too shallow to do this.
South African businesses are still finding their feet abroad. But the signs to date have been encouraging.
The shares of both of the mining companies, Anglo American and Billiton, have outperformed their booming sectors since they moved. The discount to other global mining groups has been eliminated.
Anglo American has simplified its convoluted structure, spun off most of the diamond producer de Beers, broadened its geographical and product base and lowered its costs.
Billiton merged with the larger Australian miner, BHP, a decision insiders credit to the more international understanding of the importance of scale in the industry.
The results for SAB have been more mixed. It has certainly used its listing to build an international business. But the shares have not done terribly well, partly because the jury is still out on its risky $3 billion acquisition of Miller Brewing in the US.
For the most part, the move to London seems to have delivered what the emigrants sought – a lower cost of capital, enabling them to compete in the global market for acquisitions. SAB, for instance, estimates that its cost of capital fell by 600 basis points when it listed in London.
The only real flops have been the financial stocks. They have floundered partly because their lack of international experience has been a handicap. Not only has Old Mutual done badly for shareholders, it has also been forced to abandon its plans to build a global asset management business, selling most of its UK assets to Barclays Bank last year. Investec, a small investment bank, has also struggled. It has no real competitive advantage in the big London market.
For South Africa, the shift of primary listings – the companies have kept their South African listings as secondary – has probably been advantageous overall. On the positive side, the commitment to keep up investments in the old country has been retained, despite the predominance of foreign shareholders. Indeed, the lower cost of corporate capital has probably made South Africa’s mines more globally competitive. SAB and Old Mutual have not lost any significant local market share, despite many distractions.
The most important advantage for the country is probably the hardest to quantify. The generally good reports on business conditions at home from the newly displaced South African companies have probably helped maintain the country’s reputation as a reasonably safe place to invest.
The main disadvantage has been financial. Dividend payments to South Africa have fallen because foreign shareholders now predominate in these international companies. There has also been a blow to financial pride – the South African stock exchange moved from being 16% to 6% the size of the London market, although part of the problem has been a lack of new listings.
Considering the economic challenges that the government faces, most noticeably 30% unemployment and a 20% rate of HIV infection, the internationalization of the country’s capital base has to be considered a great success.
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