DealZone

U.S. drugstore operator Walgreen is to buy rival Duane Reed for $618 million from private equity firm Oak Hill Capital Partners, giving the company the market lead in New York. The acquisition brings the company 257 new stores in the city and has prompted analysts to think that struggling chain Rite Aid might make an attractive target for Walgreen rival CVS Caremark as it looks to catch up.

Britain’s Babcock International has increased a proposed offer to buy defence firm VT Group to as much as 1.29 billion pounds, but its advances have again been rejected.

For more Reuters deals stories, click here.

In other media:

Beijing’s sovereign wealth fund, China Investment Corp, is investing $1.5 billion with three private equity secondary specialists – firms that buy positions in buyout funds from other investors – the FT reported. CIC will put $500 million with each of Lexington Partners, Goldman Sachs and Pantheon Ventures in special accounts that will be kept separate from the firms’ main funds.

 Leading shareholders in Telecom Italia are discussing among themselves the possibility of merging with Telefonica of Spain, the FT writes. The discussions are said to be informal and preliminary but involve Telecom Italia’s three biggest Italian shareholders – Mediobanca, Intesa Sanpaolo and Generali.

Barclays will look a whole lot healthier after securing $13.5 billion from BlackRock for its crown-jewellish BGI asset-management arm. This is the same Barclays that turned down aid from the British government and bought defunct Lehman Brothers’ U.S. investment banking business in September, giving it that heroic posture of a down-but-not-out, maybe somewhat punch-drunk prize fighter — Britain’s own Rocky Balboa. Now, as far as Chief Executive John Varley is concerned, BGI-less Barclays is one of the best-capitalized banks in the world.

Investors are cheering Barclays on. Its share price has soared more than fivefold in the last three months, after crashing to a 24-year low on fears that it might need taxpayer funds.

The deal makes BlackRock the world’s biggest asset manager. Though the wealthy of the world are hurting in the recession along with the paycheck-to-paycheck crowd, it’s hard to see Barclays staying in the back seat of the lucrative asset-management market for long. Under the cash-and-shares deal, Barclays takes a 19.9 percent stake and two seats on the board of the enlarged group, to be called BlackRock Global Investors (giving the new firm the added bonus of not having to change BGI’s stationery).

Barclays‘ seemingly never-ending effort to get top dollar for its Barclays Global Investors unit appears to be enticing some Middle East money behind the current best bid from U.S. fund manager BlackRock, which is believed to be in the neighborhood of $12 billion.

Barclays said it had received proposals for BGI and iShares from a number of parties, including BlackRock, and was continuing talks. BlackRock confirmed the talks, but both sides said issues remained that could derail a deal. San Francisco-based BGI is the world’s biggest fund manager, with $1.5 trillion in assets under management and would more than double the size of BlackRock.

With Bank of New York Mellon also in the hunt, sources say Barclays may keep a hand in the game after a sale, possibly taking a stake of up to 20 percent in the enlarged asset manager. Media reports say BlackRock may get funding from Middle East investors, possibly including some Barclays shareholders. The Qatar Investment Authority and Adia, the government investment arm of Abu Dhabi, are in talks alongside Kuwait’s KIO to inject $3 billion into BlackRock for a 12 percent stake, the UK’s Sunday Telegraph newspaper said.

As Steve Slater and I wrote earlier:

“British bank Barclays has sidelined private equity houses bidding for iShares, its exchange-traded fund unit, and is looking to sell its entire asset management arm instead if offers approach $12 billion.

“U.S. money manager BlackRock and Bank of New York Mellon are among the interested bidders for Barclays Global Investors (BGI), the world’s biggest asset manager, people familiar with the matter said.”

Looking to boost its capital position and to justify its decision not to take state aid, Barclays is aiming to maximize the proceeds from any asset sales.