You have to hand it to Barclays. The bank has consistently managed to claw its way out of trouble all the way through this financial crisis. But at what cost?
The latest great escape came after US fund manager BlackRock agreed to buy Barclays Global Investors (the bank's fund management arm) for $13.5bn. The deal will create the biggest asset manager in the world, more than twice the size of its nearest rival. BlackRock is paying $6.6bn plus 37.8m shares, giving Barclays a stake of roughly 20% in BlackRock. Singaporean and Kuwaiti sovereign wealth funds are coughing up $2.8bn of the $6.6bn, while BlackRock is also borrowing $2bn from Barclays to fund the deal.
It's a pretty good deal for Barclays, as George Hay says on Breakingviews.com. It's slightly higher than the $12-13bn markets had been expecting, at a "generous" 12 times BGI's 2008 EBITDA (earnings before interest, tax, depreciation and amortisation).
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CVC Capital Partners, a private equity group that originally won the auction for iShares (BGI's exchange-traded fund unit) stands to get a $175m break-up fee. It now has until 18 June to table an alternative bid, but this looks unlikely, reckons the Wall Street Journal.
Barclays bosses have also done rather well out of the deal too. While Sir Fred Goodwin to whom Barclays lost the battle for ABN Amro, luckily for them has been rendered a pariah, Barclays chief executive John Varley and Barclays Capital chief Bob Diamond will get seats on the BlackRock board. Mr Diamond is also set to net around $26m personally, according to FT Alphaville.
But why are they selling BGI now, given that the unit was seen as a "core institutional business" as little as two months ago? As Lex puts it in the FT, "surrendering the 15% of steady earnings derived from low-risk asset management leaves important questions over the sustainability of the group's remaining earnings unanswered."
Diamond argues that it's increasingly hard for a bank to run both an investment banking and investment management arm. But it's more likely down to the fact that Barclays simply needs the money to bolster its balance-sheet strength. As Chris White at Threadneedle Asset Management told Bloomberg: "It does feel like a company selling the family silver. It's more important for them to restore their capital position to full health." Barclays is desperate to avoid taking the government shilling and if that means flogging some of the businesses' more attractive assets, then so be it.
So what does it mean for investors? Well, it won't make much immediate difference to people invested in any of the BGI or BlackRock products. But this is the sort of big headline-grabbing deal that would, in more normal times, mark the top of the market.
Of course, the market has already collapsed by some distance over the past year. But with this sort of excitement building around mega-mergers again, this deal might mark some sort of top in the current bear market rally.
After all, other indicators suggest that markets are turning again including the Baltic Dry Index, as my colleague David Stevenson points out in this morning's Money Morning. And Paul Hill, our regular share tipper, told readers of his PGI newsletter yesterday that he reckons "we're on the cusp of another painful lurch down on the stock markets", which will take stocks down by 10%-20% by the end of the summer.
My colleague David Stevenson suggested that Barclays might be a buy for the desperately brave back in February: Which banks will survive the slump? I didn't buy it myself, but well done to you if you did. If you're still holding it and any other cyclical stocks for that matter it might be time to take profits.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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