British financial services firm Barclays Plc (BCS, BARC.L) Thursday said it agreed to sell its iShares business to Blue Sparkle LP, a new limited partnership of European private equity firm CVC Capital Partners Group, for a total consideration of about US$4.4 billion or £3.0 billion.
iShares is a global provider of exchange traded funds, and is a 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. At the end of 2008, the iShares business had approximately 620 employees (excluding contractors and support staff) across 14 countries and five continents.
Barclays will provide about US$3.1 billion or £2.1 billion debt financing for the transaction. It will be entitled to receive 20% of the equity return from iShares once CVC has achieved certain minimum returns. BGI will retain all of its securities lending business.
The company also agreed to hold no less than 51% of the total financing for the first five years and may syndicate the remaining 49% after the first year. The remainder of the consideration will be funded by equity provided by Blue Sparkle.
Barclays said it would retain net proceeds from the transaction, after costs and assuming the distribution of a dividend to the minority shareholders in BGI comprising current and former employees, and contribute to capital resources.
The majority of the employees working within the iShares business are also expected to transfer with iShares as part of the transaction.
Under the agreement, Barclays may solicit proposals for iShares and potentially other related businesses from third parties for a period of at least 45 business days from April 15, 2009. A fee of US$50 million (£34 million) or US$175 million (£120 million) will be payable by CVC or Barclays respectively if closing does not occur due to a material default of CVC or Barclays in certain circumstances.
The initial closing is expected to take place in the third quarter of 2009, subject to certain regulatory approvals. The final closing is expected on November 2009.
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' equity tier 1 capital ratio by 54 basis points to 7.2% 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. Internal calculations by the bank have also reportedly shown that it could absorb up to £17 billion in losses before it would be required to raise new capital. Towards the end of 2008, Barclays had raised about £7 billion primarily from Qatari and Abu Dhabi funds.
BCS is currently trading at $10.42, up $1.05 or 11.21%, while BARC.L is currently trading at 177.50 pence, up 19.70 pence or 12.48%.
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