Barclays grabs huge £8.2bn as BlackRock snaps up BGI

Nick Goodway
12 Jun 2009

Barclays today agreed the much anticipated sale of its giant fund management business Barclays Global Investors to American rival BlackRock for a top-of-expectations price of $13.5 billion (£8.2 billion).

The deal seals Barclays chief executive John Varley's high-risk strategy to keep the bank out of the clutches of the UK Government after the part-nationalisation of its rivals Royal Bank of Scotland and Lloyds Banking Group at the start of this year.

It also creates the world's biggest fund manager with combined funds under management of $2.8 trillion — that is equivalent to the US government's annual budget. BlackRock Global Investors will have more than 9,000 employees in 24 countries.

Varley said: “We came to a decision not to use the Government's asset protection scheme after we passed the stress test. Since the end of the year we have done several things to strengthen our capital ratios. Today's deal will mean we are one of the strongest European banks.”

Barclays Core Tier 1 ratio, used by analysts as the best measure of balance sheet strength, will now be 8% compared with a low of just 5.25% in December 2006 before the credit crunch began.

Barclays shares dropped 5½p to 299p having run up in the last couple of days to their highest level since the government bail-out of its rivals was first announced October 2008. The shares have risen six-fold from their low point of 51.2p in January.

Varley said that the BlackRock offer was very good for shareholders. “This price represents 28% of our current total stock market value which is substantially above the 15% of pre-tax profits contributed by BGI last year.” He also denied that Barclays was selling its crown jewels. “We still have a 20% interest in the business. But the current trends in regulation and our clients' desires made it clear that there must be transparency with separation between asset managers and investment banking.”

BlackRock is itself an example of these trends. It was originally spun out of private equity giant Blackstone in 1992 and then merged with Merrill Lynch Asset Management in 2006.

Barclays will end up with a 19.9% stake in the enlarged fund manager which will be renamed BlackRock Global Investors. Barclays is also supplying, along with other banks, a one-year $2 billion loan to BlackRock to help finance the deal.

Today's deal comes in the wake of Barclays' agreement to sell iShares, the exchange traded funds part of BGI, to private equity firm CVC for $4 billion. That included a 45-day “go shop” period for Barclays to find a buyer for the whole of BGI.

CVC has a week to come up with a matching offer to BlackRock's which is highly unlikely. But it will get a $175 million break-fee from Barclays much of which it will pay back to its investors.

Barclays shareholders will vote on the deal in August and it is expected to complete by the end of the year.