Issued by: Affinity Publishing By: Prof Roger Sinclair


Brand people like to think Barclays bought 57% ownership of Absa because they recognised the value of the brand. It's more economical to buy a brand with established equity, than to pay the very high price of building it from scratch. Absa is well established, has high levels of awareness and most people think, as banks go, it is not too shabby. Why then did Barclays place such a low value on the brand?

Because Absa is still listed on the JSE Security Exchange, we know that its market capitalisation currently (May 2006) is about R80 billion. According to its 2005 annual accounts, Absa's Net Asset Value or NAV (total assets minus total liabilities, 348, 7 - 324,7) is R24 billion. Take that away from the market capitalisation and it is clear that the investors believe there is value in the company that exceeds its NAV by a little over three times (80/24 = 3,3).

The true meaning is that "the market" thinks the firm will continue to make profits and pay dividends for many years to come.

Why then, in the light of all this, did Barclays plc place a value on the Absa brand of only £172 million (R2 billion) - less than 4% of the market premium?

For a brand as strong and well supported as Absa , international norms suggest the value should be at about one third of the market premium - as high as R18 billion (£1,7 billion).

Did Barclays get it wrong?

It remains to be seen.

The method they used was Relief from Royalty. This is a traditional approach that applies a royalty rate to the turnover that the firm will probably generate over a period of between five and ten years. The argument is that if the company did not own the brand it would have to pay a royalty to the company that did.

The main problem is that the value is applied to turnover, not profit. Next it is extremely hard to know what royalty rate to charge. There are other shortcomings but these two should be enough to cast serious doubt on the approach.

Add that to the comparisons with net profit and market capitalisation and there must be some questions asked about a value of R1, 9 billion.


This is a short version of an article which will be published in full in the 2006 edition of Brands & Branding in South Africa, due to be launched to the marketing community in September. For more information, please contact Ken Preston on +27 (0)11 442 2366, ken@brandsandbranding.co.za, www.brandsandbranding.co.za

Editorial contact
Affinity Publishing
Ken Preston
011 442 2366

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[10 Jul 2006 09:49]

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