The Great Debate UK
As your friendly neighbourhood investment bank rarely tells you, something like 80 percent of deals don't pay off. So why do one if you don't have to?
That is the question facing the mighty City of London firm of Cazenove. Five years after Caz poured its investment banking business into a joint venture with the U.S. bank, JP Morgan <JPM.N>, it has to decide whether to go the whole hog and sell the remainder -- or to hang on.
Technically the shares are the subject of a put and call arrangement -- JP Morgan can force Caz's investors to sell and vice versa. But it is hard to imagine the Americans obliging the shareholders to sell if they clearly don't want to.
Which raises the question: why would they want to?
A deal has certain attractions for JP Morgan. The bank's UK business would be simpler if it owned 100 percent of its UK investment banking operations. The current set-up is quite advantageous for Caz. Not least it gives it access to JP Morgan's deep pockets and client list.
The legendary financier, JP Morgan, was said to have made his money by “selling too soon”. Some say that is exactly what Sheikh Mansour Bin Zayed Al Nahyan of Abu Dhabi has done by selling a chunk of his stake in Barclays. Other sovereign wealth funds must wish they had the same dilemma.
The Sheikh’s sale of the convertible notes that he bought as recently as November as part of a “strategic” partnership — for a 1.5 billion pound profit — has taken Barclays by surprise.
However, this sort of thing is not uncommon right now. Just look at the way Western banks are selling their stakes in Chinese financial institutions.
The Sheikh has endured a roller-coaster ride. Barclays shares plunged by almost 80 percent in the three months after he, and neighbouring Qatar, agreed to invest.
That made them look as foolish as other sovereign wealth funds that had rescued western banks and lost their shirts in the process. Given the sharp bounce in the shares since then, it is no wonder that the Sheikh has taken his profit with a sigh of relief.
The Sheikh also plans to sell down bonds with a coupon of 14 percent, but to hold on to warrants (exercisable at 198 pence versus today’s 275 pence) over around 6 percent of Barclays fully-diluted share capital.
The Qataris, who invested 2.3 billion pounds alongside the Sheikh, Singapore’s state investor Temasek, which bought in at much higher levels, and other foreign investors must be considering whether to take profits (or cut their losses) too.
Temasek is heavily skewed to banks, something that Chip Goodyear, the new chief executive, may want to address. Barclays is in a stronger position than RBS and Lloyds, which both survive thanks to extensive state support: it is still profitable, it will pay a dividend this year and its capital markets arm is doing brisk business in volatile markets.
Moreover, there is some technical support for the bank’s share price because the conversion from notes to shares at month-end will increase the bank’s weighting in the FTSE 100 index from 2.0 percent to 2.6 percent.
However, the capital markets boom is unlikely to last. Much of Barclays’ strength is already priced in to the shares, which are trading above book value. Moreover, the revelation of the details of Britain’s stress tests last week showed that the assumptions used were not that pessimistic.
The true cost of the recession has not yet hit the bank. Even if the shares rise further, there are less stressful ways for the Sheikh to make money — especially if he wants to sleep at night.
from The Great Debate:
Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.
from The Great Debate:
Government intervention or not, banks will be cutting up America's credit cards at an unprecedented rate, with grave implications for the economy and company profits.
The U.S. Federal Reserve last week added more nutrition to its alphabet soup of rescue programs when it unveiled the Term Asset-backed Securities Loan Facility (TALF), under which, among other things, it will lend up to $200 billion to investors in securities backed by credit-card, auto and student loans.