Barclays last Friday finally put CVC Capital Partners out of its misery and announced that it had received a binding offer worth US$13.5bn for the whole of its Barclays Global Investors division from BlackRock. As part of the deal, Barclays would take a 19.9% stake in BlackRock, which would be renamed BlackRock Global Investors.
CVC had been bidding for the iShares arm of BGI that Barclays had put up for sale earlier this year, and for which a preliminary agreement – subject to a go-shop clause – had been announced on April 9. CVC, which had bid US$4.4bn for iShares, now has until June 18 to submit an offer that matches or betters the BlackRock bid, but this is not considered likely.
Selling a major financial asset in the middle of the biggest bear market for 80 years might have seemed an unenviable prospect when Barclays’ shares stood below 50p in January. At that level, the bank had a market value of just £4bn.
Therefore to get £8.2bn for BGI, which accounts for no more than a sixth of Barclays’ overall earnings, appears an incredible achievement. Creating a competitive process, when buyers are scarce and funding is scarcer, must be applauded.
CVC acted as a fine pacesetter, offering to pick off iShares, the retail part of BGI with the highest margins, for a reasonable £3bn. However, that deal looked like window dressing for Barclays, since it was going to have to stump up 70% of the cash to get the sale done.
CVC has earned a tasty £106m for its efforts over the last four months, probably its best deal ever if judged by private equity’s favoured ‘internal rate of return’ measure.
Barclays said that the net gain of US$8.8bn would add 150bp to core Tier 1, taking it to 8% after also assuming full conversion of the mandatorily convertible notes issued in November 2008.
According to one senior banker who has been close to the iShares situation, although not working directly on the BlackRock deal, Barclays did not launch the iShares sale merely as a way of stimulating interest in the broader BGI division.
“Like a lot of transactions, in the beginning this didn’t have a very strategic rationale,” said the banker. “They needed to raise capital, they needed to get their Tier 1 to a certain level, they looked in the closet and pulled out an old golf bag. They were very clever in having a long go-shop period, though.”
The banker also dismissed speculation that Barclays would be using the proceeds to build a war-chest for future acquisitions of other companies. “There’s no war-chest for acquisitions. What they are doing though is using the money to buy people and using this market opportunity to build a full-service investment bank.”
Some analysts, however, remain wary of underlying issues in the bank’s balance sheet and franchise strength. Initiating coverage of Barclays last week, credit analysts at RBC Capital Markets said that recent results had been very reliant on one-off gains. The BGI sale was another of these.
“Barclays’ high rabbit-from-hat rate generates positive headlines and distracts market attention from underlying franchise issues, in our view,” said the analysts. “This high rabbit-from-hat rate is unsustainable and Barclays is likely to generate heightened volatility in the income stream over the medium term from relatively less risk-deleveraging than its competitors.”