British bank Barclays raised its bid for Dutch group ABN AMRO to 67.5 billion euros ($93 billion) on Monday, helped by some of the biggest ever overseas investments by China and Singapore.
Barclays said its new bid included 24.8 billion euros in cash and was up from its previous all-stock offer of 65 billion euros. The offer is still below a rival 71 billion-euro bid from a group of European banks led by Royal Bank of Scotland (RBS).
A deal with either Barclays or the RBS team, which includes Spain's Santander and Belgian-Dutch group Fortis, would be the biggest ever bank takeover.
Analysts said Barclays was playing a shrewd game, signaling it would not engage in a destructive bidding war but also creating the possibility that a strong rise in its shares could push the value of its bid towards the RBS team's price.
We continue to believe the (RBS) consortium will prevail, Bernstein analysts said in a research note.
But with the value gap to the consortium offer now only about 7 percent and the offer remaining 63 percent stock, gains in Barclays share price would further close the gap.
At 1145 GMT, Barclays shares were up 2.9 percent at 734 pence, boosted by the investment from China and Singapore and strong first-half results, and lifting the value of its new bid for ABN AMRO to almost 69 billion euros.
ABN shares were up 0.9 percent 36.95 euros, above the current value of the new Barclays bid at 36.39 euros but below the current value of the RBS group's bid at 38.30 euros.
Some analysts believe the RBS offer has greater risk of failing because of its complexity and regulatory issues.
Barclays, Britain's third-biggest bank, said its new offer had not been recommended by ABN AMRO, but Chief Executive John Varley said he hoped and expected that it would be.
ABN AMRO, which has come under pressure from some shareholders to back the higher RBS consortium bid, said it was assessing both offers, but noted the planned strategic cooperation with China and Singapore would boost the growth opportunities available to the combination with Barclays.
Barclays said China Development Bank, whose main function is to make loans in support of Chinese government policies, and Singapore stake investor Temasek had agreed to invest up to 13.4 billion euros in Barclays.
An initial investment by them of 3.6 billion euros would be used by Barclays to buy back shares during the takeover process, which analysts said would help underpin its share price.
This finally explains why Barclays management have been so confident for so long, despite having a seemingly inferior offer on the table, Pali International analyst Bruce Packard said.
The remainder of the investment from China and Singapore, almost 10 billion euros, will be made if Barclays wins ABN.
Barclays also reported a 12 percent rise in first-half pretax profit to 4.1 billion pounds ($8.5 billion), compared with an average forecast of 4.0 billion pounds in a Reuters Estimates poll of six analysts.
Some analysts believe Barclays could come under pressure from its shareholders to back down in the face of the greater firepower of the RBS consortium, but Barclays President Bob Diamond told Reuters that he was confident of their support.
There are a lot of shareholders who would like to have the equity of the combined business going forward, he added.
BIGGEST CHINA INVESTMENT
China Development Bank will take a 3.1 percent stake in Barclays, potentially rising to 8 percent of an enlarged Barclays, while Temasek will take a 2.1 percent stake in Barclays, potentially rising to just over 3 percent.
Barclays CEO Varley said China Development Bank's stake would be the biggest overseas investment by China and he was entirely comfortable with it becoming the biggest shareholder.
I think it will be regarded as a very significant event in global markets, it's by far the biggest external investment ever made by China, Varley said.
China Development Bank is one of the country's three lenders driven by a strategy to support government policy.
Flush with $1.33 trillion in foreign exchange reserves, China has made no secret of its intention to diversify its portfolio of foreign holdings, which is currently concentrated in government assets.
Separately, two sources familiar with the situation said Barclays had won regulatory approval to buy almost 20 percent of New China Trust & Investment Co, securing a foothold in the country's fast-growing asset-management sector.
Barclays is the latest in a string of bets on financial companies by Temasek. About a third of its $85 billion portfolio is made up of financial services firms and last year it bought an 11.6 percent stake in UK-based Standard Chartered.
(Additional reporting by Mark Potter, Clara Ferreira-Marques and Dan Lalor in London, Reed Stevenson in Amsterdam, Jan Dahinten in Singapore and George Chen in Shanghai)