Barclays adds Asian firepower to ABN AMRO bid

China Development Bank and Temasek buy small stakes in Barclays as the UK bank increases its offer for ABN AMRO.
Barclays announced yesterday that China Development Bank and Temasek have become financial-cum-strategic investors in the bank, and then quickly followed this news with an increase in its offer to buy ABN AMRO.

China Development Bank and Temasek will unconditionally invest Ç3.6 billion ($4.98 billion) in Barclays and the UK bank will use some or all of the proceeds to launch a share buyback programme. The strategic investors will contribute up to a further Ç9.8 billion, contingent upon Barclays being successful in its enhanced offer of Ç67.5 billion for ABN AMRO.

In an exclusive interview with FinanceAsia, chairman and CEO of Barclays Capital, Robert Morrice says: ôBarclays has longstanding working relationships with China Development Bank and Temasek. This is a win-win situation which will create considerable value for all the parties involved.ö

Barclays Capital approached China Development Bank and Temasek to invest in Barclays Bank in May, one month after the British bank made its bid for ABN AMRO. Barclays Capital advised Barclays Bank on the deal and structured the investment.

China Development Bank (CDB) will pay Ç2.2 billion for a 3.1% stake in Barclays, representing a price of ú7.20 ($14.81) per share. With the subscription, CDB has negotiated the right to nominate a non-executive director to the Barclays board.

If Barclays is successful in winning ABN AMRO, CDB will subscribe to up to Ç7.6 billion of further equity, at a price of ú7.40 per share. To allow existing Barclays shareholders to participate in the expansion of the capital base, Ç1.8 billion of the CDB allocation will be available for ôclawbackö at a price of ú7.40 per share. This gives shareholders of Barclays (outside the US) an option to buy these shares at ú7.40, the same price as CDB will buy the second, conditional tranche of shares.

Post the conditional issuance, CDB will own a stake of between 6.3% (if all clawback shares are taken by existing shareholders) and 7.7% (if no existing shareholders exercise their entitlement to clawback shares) in the merged Barclays-ABN.

Once the merger reaches completion, CDB will also be issued warrants for 61 million Barclays shares at an exercise price of ú7.80 per share, exerciseable within two years from the date of issue. The warrants represent a further 0.5% stake in the Barclays-ABN combine. CDB has agreed that any open market purchases it makes to further raise its shareholding in Barclays will not increase its total shareholding higher than 10%, for a period of three years from the date of the investment.

China Development Bank was advised by Blackstone Advisory.

Temasek will pay Ç1.4 billion for a 2.1% stake in Barclays. The Singapore-based investment firm has agreed to conditionally subscribe to a further 2.2 billion of Barclays shares, with Ç700 million of the Temasek allocation available for ôclawbackö. Temasek will own a stake of between 2.4% and 2.9% in the combined Barclays-ABN.

Post merger, Temasek will also be issued warrants for 61 million Barclays shares under the same terms and conditions as CDB. Temasek will be entitled to a non-executive director if it makes the second, conditional investment.

Temasek has stakes in a number of banks including an 11.5% shareholding in Standard Chartered Bank which it acquired in 2006. This holding represents the single largest stake in Standard Chartered.

Barclays emphasised that the strategic rationale to seek the investment by CDB and Temasek is compelling and said it will work with both investors to cross-sell products and to service each other's clients across the world. For example, Barclays stated in a written statement that ôthe franchise with CDB will strengthen Barclays Asian focus and particular areas of focus include near term opportunities in wealth and asset managementö.

The promise by the two Asian institutions to invest a further Ç10 billion in Barclays has given the UK bank the fortitude to increase its offer for ABN AMRO.

Soon after the deal was signed with CDB and Temasek, Barclays improved its offer for ABN AMRO to Ç67.5 billion, with Ç24.8 billion in cash and the balance in shares. This is a Ç4.5 billion increase on the deal Barclays and ABN AMRO agreed in April and the first time Barclays has introduced a cash component. The competing bid from a consortium of Royal Bank of Scotland, Fortis and Santander offers Ç71 billion for the Dutch bank, of which more than 90% is payable in cash. The consortium intends to break up the bank, if successful.

ABN AMRO said in a statement after it received the Barclays bid that it "welcomes the opportunity for shareholders to consider two competing proposals on a level playing field".

The original Barclays bid was backed by ABN AMRO. But the sale of the bank has been precipitated by shareholders who feel the bank is not performing on bourses. Analysts have commented that ABN AMRO will have a hard time turning down more cash on the table.

All eyes are now on ABN AMRO and its shareholders to make the next - and perhaps the final - move in this takeover battle, which represents the largest ever bank M&A deal. Whatever the outcome of the story, it seems that Barclays has concluded that aligning itself more closely with Asian financial institutions is in the British bank's best interests.
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