Barclays goes east to raise funds but leaves its existing shareholders fuming

Bank's denial of pre-emption rights and attractive terms offered to Middle East investors have caused a stir.
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When Manchester City play Tottenham Hotspur this afternoon, the northern team's new owner will receive a cheque from the Premier League's sponsor, Barclays. But by the end of the month, club owner Sheikh Mansour bin Zayed al Nahyan will give the bank a far larger cheque. In exchange for £3.5bn, the sheikh will become Barclays' biggest investor.

Barclays' other shareholders are as sick as bottom-of-the-league Spurs fans. The Abu Dhabi sheikh and investors from nearby Qatar are injecting capital on such attractive terms that the bank's existing shareholders wish they could participate, too.

In a series of meetings with City institutions last week, chief executive John Varley had to explain why these Middle Eastern investors will own one-third of the British bank.

Investors whose Barclays shares have crashed 75 per cent since last year believe they should be offered first option on any new shares. But despite calls to change the terms, the bank will this week publish the circular detailing the issue and will make no concessions. The Association of British Insurers, representing big investors, last week asked Barclays why it ignored the pre-emption rules that require new shares to be offered to existing investors. It is now expected to issue an "amber alert" telling members to question whether to approve the capital raising.

Varley claims he still believes in pre-emption rights, but rejected a conventional rights issue after seeing the share prices of other banks mauled by the market as they tried to raise cash. "The experience of those banks who took the rights-issue path during 2008 is not something that inspired confidence," he says.

He points, too, to the volatility in shares since the Financial Services Authority last month ordered Britain's banks to boost their balance sheets. "The decision we adopted around the Barclays board table was that we should move quickly," he explains.

Barclays was told to find an additional £6.5bn of new capital, even though it had raised an extra £4.5bn in July and another £700m in September when it bought parts of the collapsed Lehman Brothers.

Rivals HBOS, Royal Bank of Scotland and Lloyds TSB accepted the Treasury's offer to provide £37bn of capital in exchange for a major shareholding, but Varley was determined to keep Barclays free of the UK Government. He claims that it was clear ministers would want to interfere with his bank's strategy.

Critics suggest one interference that he was keen to avoid was a curb on pay, not least for Bob Diamond, Barclays' £20m president, and Roger Jenkins, chairman of its Middle Eastern operations and a key figure in raising the new capital, who is reported to receive double that. Barclays chairman Marcus Agius strongly denies state funding was shunned to maintain bonuses. "Was this capital raising chosen with that in mind? Absolutely not," he says. "The decision was taken in the interests of the company as a whole." But going it alone proved difficult. Russia, Libya and Japan rejected Barclays' pleas. It returned to the governments of Singapore and China, which bought shares in the summer financing, but they had no wish to add to their losses.

The bank thus had to turn to the Emirates. Jenkins's wife, Diana, is a close friend of the Qatari Prime Minister Sheikh Hamad Bin Jassim who, like the Qatar Investment Authority, which he runs to invest his country's oil wealth, had bought shares in the summer issue.

The QIA – also a major investor in Sainsbury's and the London Stock Exchange – agreed to invest a further £2bn to double its Barclays stake to 12.7 per cent, while Sheikh Hamad, through a company recently registered in the British Virgin Islands, will invest £300m, raising his stake to 2.8 per cent.

Sheikh Mansour, not at that point a Barclays investor, was introduced to the bank by Amanda Staveley, the glamorous financial broker and former girlfriend of Prince Andrew who has built on racing contacts made while running a restaurant near Newmarket. She negotiated the sheikh's purchase of Manchester City in September and helped him form three Jersey-based companies to hold his 16.3 per cent stake in Barclays.

Yorkshire-born Miss Staveley believes Middle Eastern countries are ready to invest billions more in UK companies, including further football clubs. She fronted the unsuccessful £400m bid for Liverpool FC from Sheikh Mohammed bin Rashid al Maktoum this year.

The Prime Minister Gordon Brown met with Sheikh Mansour last week during his visit to the region as he sought contributions to the International Monetary Fund.

But the price of attracting the new Barclays investors is making existing shareholders angry and envious. Barclays originally said it would issue £3bn worth of preference shares by December and another £3.5bn of ordinary shares after producing its accounts next spring. That plan has been ripped up and new investors are being offered special instruments that pay a whopping 14 per cent interest plus the chance to buy shares at 22 per cent below last week's market price. The bank must also pay £300m in fees and expenses to raise the capital, including commissions of up to 4 per cent to the new investors – in effect, an instant cashback on their payments – and £66m to the Qataris. Miss Staveley's PCP Gulf Partners company will pocket £40m.

Some investors say that this is a high price for independence. The Treasury is charging other banks only 12 per cent for preference capital, even after tax relief, Barclays' overall finance cost is about 13 per cent. And while Lloyds TSB hopes to redeem its preference shares next year and resume ordinary dividends, Barclays is committed to its high payment for 10 years. Barclays argues that avoiding the taint of partial nationalisation will benefit the bank not only now, but in decades to come. Varley also sees advantages in ownership that reflects the changing sources of world capital. "We are already seeing the benefits of our relationship with QIA in our capital-markets business in the Middle East," he claims.

The bank employs 2,600 staff in the region, mostly at its 51 branches in Egypt, but 890 work in the Emirates. There are offices in Dubai and Qatar, and a new base has recently been opened in Abu Dhabi.

Barclays Capital has 22 investment bankers in the Emirates, plus four sales staff, while there are another five investment managers and 65 staff in wealth management.

Mentioning Barclays' acquisition of Lehman's US business, and the recruitment of 50 RBS investment bankers who focus on the Middle East and Asia, Mr Diamond adds: "We see that as being pretty enhancing. Over the past seven or eight weeks, consolidation has galloped. The business Barclays Capital operates in: there are only four banks in the US now – not 12 – and there are only two or three serious competitors internationally."

Existing investors will be asked to vote for their own dilution on 24 November, but they know that rejecting the proposal would damage their bank even further. Roger Lawson of the UK Shareholders' Association says: "We would have liked them to stick to normal pre-emption rules, but the Government is forcing them to raise so much money at such short notice."

The Treasury, however, has underwritten share issues for Lloyds, HBOS and RBS that allow existing investors to subscribe. With their shares climbing above the issue price last week, they may end up less in hock to the UK Government than Barclays will be to its Emirate owners.