Barclays’ moves to escape bailout

BRITAIN-BANKS/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.

Good medicine for Morgan Stanley

USA/Morgan Stanley‘s jump from 10th to first in our M&A league table should put them on cloud nine. The first quarter was busy with drug deals, and Morgan Stanley was in on the biggies: advising Wyeth on its $64.5 billion acquisition by Pfizer, and Schering Plough on its $46 billion takeover by Merck. And with the ink still to arrive on the paper of both deals, more good stuff could be on the horizon. The trick for Morgan Stanley, and anyone wanting to take down the king of the hill, is to spot and exploit the trend.******If drug deals remain du jour — and many expect the sector to stay hot, despite all the swallowing going on — the trend will certainly be toward Biotech. The markets for biologics and pipeline-filling cancer treatments have been strong in the face of expected government action to lower doctor and drug bills.******The heightened merger activity in Big Pharma has switched the tables a bit in the sector. After Roche’s nearly $47 billion acquisition of Genentech, analysts became increasingly convinced that the remaining big biotechs like Celgene, Gilead, Genzyme, Biogen Idec and Amgen could emerge as buyers, given that traditional Big Pharma is either digesting deals or just not so big anymore.******Christopher Kaufman; DealZone Editor******Deals of the Day:******* Drug maker Lupin Ltd said it has acquired a 51 percent stake in Multicare Pharmaceuticals Philippines Inc, marking the Indian firm’s foray into the $2.5 billion Philippines pharmaceuticals market.******* Britain-based dairy products maker Dairy Crest said it had sold its 49 percent stake in Yoplait Dairy Crest (YDC) to the Yoplait Group for 63.5 million pounds ($92.66 million) and that it would use the cash to reduce debts.******* Austrian steelmaker Voestalpine said its North American unit, VAE Nortrak had acquired U.S-based Leading Enterprises Inc, a supplier of speciality components for railway tracks, as part of a plan by the company to expand its railway division.******(PHOTO: A sign is pictured on Wall St. near the New York Stock Exchange in New York November 25, 2008. REUTERS/Lucas Jackson )

(Be)league(red) tables

Preliminary first-quarter data from Thomson Reuters on mergers and acquisitions (M&A) and capital markets are out. And unsurprisingly, spring has not sprung in investment banking, with the big exception of a record deluge of corporate bonds.

Fees across investment banking (M&A, loans, and debt and equity capital markets) halved, while fees for completed M&A topped that with a 68 percent fall. Overall announced M&A fell by a third, compared to the same period last year, to $444 billion.

And even that figure is flattered by two huge pharma deals, which bankers doubt will be followed by more of the same, and a flurry of bank bailouts.

Taking the Wall St bypass

THAILAND APECRemember early last year and the year before, when the U.S. financial system won huge investments from Asian sovereign wealth funds? Those investments seemed so rich at the time, offering conversions into shares at deep discounts and the kind of interest rates banks had demanded from subprime borrowers. The biggest fear anyone on Wall Street had was some vague sense that foreign ownership of U.S. financial institutions might be somehow un-American or a threat to national security.

Nobody talks about those days much anymore. Merrill Lynch, the recipient of billions of expensive sovereign wealth fund support, was swallowed up by Bank of America. Talk of nationalization swirls around Citigroup, another sovereign wealth fund investment target throughout the stunning collapse in its share price.

Our correspondent George Chen reports China’s $200 billion sovereign wealth fund, China Investment Corp, is shifting to natural resources, fixed income and real estate after taking big haircuts on the U.S. financial sector. The fund, headed by former Vice Finance Minister Lou Jiwei, “has drawn criticism at home over large paper losses on its combined $8.6 billion investments in U.S. private equity giant Blackstone Group and Wall Street bank Morgan Stanley,” Chen says, citing people familiar with the matter.

Nationalization Boogeymen

FINANCIAL/BAILOUT-CEOS(Updated with references from Paul Kanjorski’s office)

Lined up to pay their dues, Wall Street CEOs met their congressional inquisitors on Capitol Hill, sparking bouts of righteous indignation peppered with cringe moments worthy of The Office.

Pennsylvania Democrat Paul Kanjorski implored the posterboys for an era of high finance gone bad to “please find a way to return that money before you leave town,” referring to hundreds of billions of dollars in taxpayer bailout funds that officials believe were poured into unwarranted bonus payments instead of being used to revive the business of lending to America. At least he said please.

The message was clear. Though they may never have been instructed to lend the funds when they got them, that’s what Congress wanted. Bankers need to get back to the business of lending. That’s what they were being bailed out for. Never mind that the business of lending, conducted with adequate credit checks, was not what they were doing before, and that prudence in a period of high inflation would preclude much new lending today.

Wall Street bankers — so humble, so frugal!!!

BERNANKE/It is amazing how the prospects of a grilling in Washington can make Wall Street’s CEOs behave. Until a little while ago, these were the masters of the masters of the universe. An elite group of highly paid stars who rarely showed signs of vulnerability, who rarely seemed to doubt their place at the top of the heap. But take a look at the testimonies they have prepared for today’s hearing at the House Committee on Financial Services and it looks like they have begun to embrace the new era, the new religion.

You would be forgiven in thinking they had all also hired the same speechwriter. They mostly stress they are prudent, frugal, humble, though not quite yet apologetic — it will be interesting if that changes once the grilling begins. Here are some of the themes:

Public anger towards Wall Street is justifiable:
“It is abundantly clear that we are here amidst broad public anger at our industry. In my 26 years at Goldman Sachs, I have never seen a wider gulf between the financial services industry and the public. Many people believe — and, in many cases, justifiably so — that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system’s stability.” — Lloyd Blankfein, CEO of Goldman Sachs Group.

Evercore gets league table boost; Lazard left in the cold

Pfizer Inc’s $68 billion deal to buy Wyeth gave boutique investment banking firm Evercore Partners a huge jump in the rankings of merger advisers, while Lazard Ltd got left on the sidelines.

One mega-deal was enough to catapult Evercore, which advised Wyeth along with Morgan Stanley, into the list of Top 10 advisers. Evercore now stands at No. 7 for the global and U.S. rankings, up from No. 24 and No. 16 in 2008, according to data from Thomson Reuters.

Morgan Stanley stands at No. 2 globally with 15 deals, and No. 3 in the United States with 10 deals, according to Thomson Reuters.

Size Matters

MARKETS-STOCKS/“Too big to fail” are four words that should fill U.S. policymakers with dread. They imply a necessity for solvency beyond an institution’s ability to make good business decisions. They’re also a badge of achievement that commands a bit more swagger on Wall Street.

So when Bank of America, with $2.7 trillion in assets and 308,000 employees, says it needs more help in the form of billions of dollars from taxpayers, which we have set aside for just this kind of mess (the Troubled Asset Relief Program), you could argue that this is both economic blackmail and reward for a job well done.

What happens when a bank becomes too big to fail? It gets shrunk down to a size more collapsible. The titans of Wall Street know a thing or two about being in hock to the people. Take a look at Citigroup. It’s all well and fine for CEO Vikram Pandit to say the sale of his brokerage business to Morgan Stanley was not mandated by the government, which has lent Citi $45 billion to stave off failure. But it’s hard not to see a wink and a nudge in there somewhere. This was not some non-core, fringe business — it’s more like an arm or a leg.

Morgan Stanley: Et tu, Mack?

ceasarIt’s not every day we have to dust off our Latin texts to cover Wall Street news, Morgan Stanley’s plan to acquire Citigroup’s Smith Barney brokerage over the next five years inspired eclectic Bernstein Research analyst Brad Hintz to invoke Julius Caesar: “Alea Iacta Est” “The Die is Cast!”

Hintz, in a client note, draws a parallel between the ambitious young conqueror, who uttered the above while leading his army across the Rubicon to reclaim Rome, with Morgan Stanley CEO John Mack, who with this latest move accelerates the investment bank’s expansion into retail financial services.CHINA FORUM

He argues the new strategy is not unlike the one advanced by former CEO Philip Purcell, whom Morgan’s board threw overboard in 2005 as the bank lost ground to Goldman Sachs. Purcell launched the Discover credit card and merged his middle-class Dean Witter brokerage with Morgan Stanley & Co in 1997. Over time, he frustrated the white shoe bankers with his aversion to taking investment and trading risks.

Happy Birthday, Vikram

FINANCIAL SUMMITWith the ink drying on Citi’s deal to sell Smith Barney to Morgan Stanley, the media bulls-eye is focusing on Citi CEO Vikram Pandit. “Citigroup’s board may have said it is standing behind CEO Vikram Pandit, but the general consensus on Wall Street is that he is running out of time,” CNBC’s Charlie Gasparino reported this morning. Pandit’s predecessor Chuck Prince certainly had boardroom support when the street turned against him, so tales of Pandit’s demise may not be too exaggerated, though they could not have been more callously timed. Today is Vikram Pandit’s 52nd birthday.

Of course, it’s a truism of corporate America that every CEO has the support of his board — until he doesn’t. And even if the current board is rock solid for Pandit, it’s an open question how safe the board’s own tenure is given the bank’s miserable track record — and the fact that Uncle Sam is now its top shareholder.

Citigroup, once the world’s largest bank, may announce plans on Jan. 22 to formally shed the “financial supermarket” approach once championed by former Chief Executive Sandy Weill, but which Pandit has now turned his back on.