Barclays’ moves to escape bailout
Investors have welcomed the prospective £3bn (US$4.4 billion) sale of iShares by Barclays, which gives strong hope that the bank can avoid accepting a UK Government bailout and its implicit restrictions.
Since the deal announcement, Barclays’ shares have risen by 26 percent to 198.8p, their highest point since October, when a rescue £7.3bn financing was arranged with royal potentates from Qatar and Abu Dhabi. These Gulf investors agreed to subscribe for an effective 31percent stake through separate issues at 153.3p and 197.8p. Now, both slugs are “in the money”. However, that cash has not come cheaply.
The £4.3 billion of mandatorily convertible notes, which must be converted into shares at 153.3p by the end of June, receive a 9.75 percent coupon. And the £3 billion of reserve capital instruments pay 14 percent annually, or £420 million, for 10 years. They have warrants convertible at 197.8p.
The iShares proceeds could neatly pay off the holders of the reserve capital instruments. Removing that shackle is the aim of chief executive John Varley, and Barclays Capital boss Bob Diamond in particular. Then dividends could flow freely again. Diamond’s other goal is to make Barclays Capital an investment bank to challenge the few remaining serious players with global scope, such as JP Morgan, Goldman Sachs, Morgan Stanley, Deutsche and the Swiss banks.
The purchase of Lehman’s US advisory business, together with heavy recruitment across the Middle East and Asia, are helping Barclays catch up. But Goldman is extending its lead, after Monday’s strong first-quarter results and $5 billion share sale plans. The money Goldman raises will help pay back US Government funds. Barclays wants to pay off its Gulf rescuers too. However, the iShares sale will only add £1.5 billion net to Barclays balance sheet, bearing in mind iShares’ £1.5 billion book value.
So to pay off the reserve capital instruments and keep Tier 1 capital above the expected 7.2 percent, a higher bid needs to be found. The novel “go-shop” deal structure gives Varley and Diamond until June 18 to solicit such offers. However, a higher bid is unlikely. CVC has offered a generous 10 times historic EBITDA and Barclays is already putting up debt worth 70 percent of the sale price.
Selling all of Barclays Global Investors is an alternative. That could raise £6.73 billion on the same valuation as CVC’s offer for iShares, the smaller but higher margin part of the business.
Reporting by Chris Spink, from Acquisitions Monthly
(PHOTO: A video grab image shows Chief Executive Officer (CEO) of Barclays, John Varley, speaking to the House of Lords Economic Affairs Committee in London March 17, 2009. REUTERS/Parbul TV via Reuters TV)