Thursday, British financial services firm Barclays Plc (BCS, BARC.L) is reportedly closing in on a deal with private equity firm CVC Capital Partners Ltd. to sell its iShares unit for about 3 billion pounds or US$4.29 billion. The deal is expected to be announced as early as today or next week. Barclays will retain a 20% stake in iShares, and may lend CVC two-thirds, or as much as 70% of the purchase price.
Earlier in the month, UK's third-largest bank Barclays confirmed media speculations that CVC Capital Partners is its preferred bidder with regard to the sale of iShares unit, its Exchange-Traded Funds or ETF business. Barclays added that subject to satisfactory conclusion of their negotiations, iShares would be sold, minus the securities lending business, to the Luxembourg-based private equity and investment advisory firm.
The iShares unit is part of Barclays' San Francisco-based asset management arm, Barclays Global Investors or BGI, which enables investors to buy entire indices in one trade. iShares account for a quarter of the $1 trillion fund management business of BGI. Investors have continued to pour cash into these funds, which track indexes ranging from big-company U.S. stocks, to bonds, commodities and real estate as well as offering about 360 exchange-traded funds globally.
Under the securities business which Barclays is retaining, the bank lends shares and other securities to hedge funds or investors to assist in short-selling. Barclays stated that earlier speculations had assumed that iShares would be sold along with its securities lending business.
Under the proposed deal, which is expected to be finalized soon, Barclays would get warrants equivalent to 20% in iShares, and will keep its securities lending division. The warrants would allow the company to participate in any upside in the value of iShares in the future. In addition, Barclays may provide loans equal to about two thirds of the purchase price to CVC Capital Partners in order to help finance the deal.
Another San Francisco private equity firm Hellman & Friedman was also considered to be among the bidders for iShares. The proposed deal would see an end to several weeks of talks with various buyers, including Goldman Sachs Group, Inc. (GS), as well as Bain Capital LLC and Colony Capital LLC, which had teamed up as possible bidders.
The potential sale is seen as a move to boost Barclays' capital without issuing shares or turning to the U.K. government for aid. The proposed deal to sell the company's fast-growing business is expected to boost Barclays' core tier 1 capital ratio to over 7% from 6.7% at the end of December, aiding its attempt to bolster its balance sheet.
Barclays made an announcement last week regarding its non-participation in the U.K. government's Asset Protection Scheme or APS, a scheme designed to insure the so-called toxic assets of banks following discussions with major shareholders. Barclays' decision is seen as a bold bet on its ability to weather the economic downturn without government support. However, it also means that the company remains free of government interference, unlike its peers like Lloyds Banking Group plc (LYG, LLOY.L) and Royal Bank of Scotland Group plc (RBS, RBS.L), which have ended up giving large controlling stakes to the government as the price for participation in the APS.
The move also follows an announcement by Barclays earlier that it passed a stress test to its balance sheet by the U.K. Financial Services Authority, or FSA, indicating that it may not need more money from the government. Barclays is now expected by analysts to raise money by selling assets or issuing shares in a bid to shore up its capital. Also, internal calculations by the bank have reportedly showed that it could absorb up to GBP 17 billion in losses before it would be required to raise new capital. Towards the end of 2008, Barclays had raised about 7 billion pounds primarily from Qatari and Abu Dhabi funds.
BCS closed Wednesday's regular trading session on the NYSE at $9.37, up $0.07 or 0.75% on a volume of 3.86 million shares. The stock has been trading in a broad range of $2.75 to $39.98 in the past 52 weeks. However, in the after-hours trading, the stock climbed $0.93 or 9.93% to close at $10.30.
BARC.L closed Wednesday's regular trading session on the London Stock Exchange at 157.80 pence, up 0.10 pence or 0.06% on a volume of 60.90 million shares. In the past 52 weeks, the stock has been trading in a broad range of 47.30 to 505.50 pence.
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