Barclays has sold its iShares business to private equity firm CVC Capital Partners for $4.4 billion, continuing its efforts to shore up its capital base. But, reflecting Barclays' eagerness to close a deal as well as the fact that private equity firms are only willing to do deals if leverage is secured, the UK bank will provide $3.1 billion of debt financing to CVC to effect the deal.
Barclays will book a net gain on the sale of $2.2 billion, taking into consideration goodwill of $1.4 billion, from a business it has mostly grown organically over the past five years. Including this gain and the capital it raised primarily from Middle Eastern investors in November 2008, the UK-headquartered bank would have had a tier-1 ratio of 10.3% on December 31, 2008.
Barclays will be entitled to 20% of the equity return from the iShares business after Luxembourg-based CVC achieves a defined minimum return. Barclays is advised by Barclays Capital and Lazard with Clifford Chance and Sullivan & Cromwell providing legal advice. CVC is advised by Deutsche Bank.
iShares is a global provider of exchange traded funds (ETFs) and forms part of Barclays Global Investors, the bank's California-based asset management arm. BGI had $1.5 trillion of assets under management at the end of 2008.
iShares had approximately 620 employees across 14 countries at the end of last year. Some of these employees and other Barclays' employees have an economic interest in iShares through shareholdings in BGI UK Holdings, which is the main holding company for BGI. These shareholders purchased their shares through an equity ownership plan, which now owns 4.5% of BGI Holdings. Including options which are not yet vested, employees own 10.3% of BGI Holdings.
Employees who are shareholders in BGI Holdings will receive a cash dividend on their shares in lieu of their shares. Bob Diamond, president of Barclays and head of the bank's investment banking division, will receive a cash dividend of up to $6.9 million, net of a $2.9 million payment Diamond will make to exercise his options.
The buy-side has negotiated a deal which sees Barclays provide $3.1 billion of debt financing to CVC. The UK-headquartered bank has also agreed to hold 100% of the debt for the first year and at least 51% of the total financing for the first five years. Barclays is free to syndicate the remaining 49% after the first year. The debt comprises $1.7 billion of senior debt and $1.4 billion of vendor finance.
The deal has been done at a multiple of 10.1 times trailing 2008 Ebitda. The financing comprises around 70% debt and 30% equity, with the debt raised at 7.5 times 2008 Ebitda. Such high multiples have not been common since the start of the credit crunch.
The senior debt is split into two tranches: a six-year, secured term-loan facility of approximately $850 million, at a spread of 4.0% over Libor; and a seven-year, unsecured loan facility with a bullet repayment at a spread of 5.5% over Libor. The vendor loan is a 10-year facility with a mandatory payment in kind (PIK) interest mechanism at 7.0%.
Barclays has negotiated a "go-shop" clause, whereby it can try to get a bidder to better CVC's offer before June 18. CVC will be paid a break fee of $175 million by BGI if a better offer is tabled and is not matched by CVC within five days.
Since it decided not to take government funding last year, Barclays has been raising equity and selling non-strategic assets to bolster its capital position. On March 30, Barclays announced it will not participate in the UK government's asset protection scheme (APS) which was announced earlier this year. The bank announced its decision only one day before the March 31 deadline for banks to indicate whether they will be part of the APS.
Barclays is trying to avoid the stringent conditions that are being stipulated together with bailout funding from the UK government, and which relate to lending and strategic direction, as well as compensation. But to retain its independence Barclays has to pass "stress tests" administered by the UK regulator, the Financial Services Authority, on its capital adequacy levels among other things.