Barclays sells iShares

Barclays PLC announced it’s struck a deal to sell its U.S.-based asset management business iShares to Blue Sparkle LP, a limited partnership established by European private equity group CVC Capital Partners Group.

The deal is valued at $4.4 billion, with Barclays making a net profit of $2.2 billion. The firm has been seeking an infusion of fresh capital so it could avoid participating in the U.K. program to insure toxic assets.

“This transaction realizes significant value for Barclays. iShares has experienced rapid growth over the past several years and has reached a point where it can develop further on a standalone basis,” said John Varley, group chief executive of Barclays. “Barclays shareholders will benefit from a reinforcement of our capital base and an ongoing commercial relationship with iShares.”

While iShares managed less than a quarter of Barclays’ assets, it accounted for more than half of the firm’s profits.

At the end of 2008, Barclays Global Investments posted a pre-tax profit of £595 million, of which £288 million was contributed by iShares. Total assets of BGI were £71.3 billion, while iShares’ assets totaled £465 million.

Barclays says the sale will continue a commercial relationship with iShares, and that it will maintain a participation interest in the company which will allow it to receive “a portion of the value uplift on iShares if certain performance-related hurdles are met.”

Under the transaction agreement, Barclays will maintain a participation interest, entitling it to receive cash payments equal to 20% of the value of the equity return from the iShares business received by CVC, assuming that CVC has earned a return of at least two-times its equity investment in the first two years. Thereafter, the minimum return rate rises to 2.5-times. The payments are also subject to iShares generating a 25% internal rate of return.

Barclays is providing the buyer with debt financing of about $3.1 billion U.S., and it will hold a minimum of 51% of that debt for at least five years. The remaining 49% may be syndicated after the first year has passed.

Under the sale agreement, Barclays may solicit rival bids for a period of 45 days, as of April 15, 2009, but the company points out there is no guarantee that a superior bid will be tendered.

The transaction is not expected to have any impact on the ETFs provided by iShares, nor on the holders of ETFs. The sale is subject to receipt of regulatory and other approvals.

(04/09/09)