CVC buys Barclays' iShares for £3bn

The bank will see a net gain of £1.5bn and its capital ratio will rise to 7.2 per cent

Barclays finalised the £3bn sale of its iShares business to CVC Capital Partners yesterday.

The deal is central to the bank's plans to strengthen its balance sheet and avoid government support. Selling off iShares, the exchange-traded funds arm of Barclays Global Investors (BGI), will give the bank a net gain of £1.5bn and take its core tier-one capital ratio from 6.7 to 7.2 per cent.

Barclays is providing debt financing of £2.1bn for the deal. It has agreed to hold no less than 51 per cent of the debt for the first five years, and may syndicate the remaining 49 per cent after the first 12 months. The money will be lent in three tranches, with interest of 4 per cent on the first £580m for six years, 5.5 per cent on another £580m for seven years, and 7 per cent on £717m for 10 years.

The bank is also entitled to 20 per cent of the equity return once CVC has hit a minimum level of returns. And the contract includes a "go-shop" clause under which Barclays can solicit other offers for iShares until 18 June, but it will pay a £120m break clause to CVC if it chooses to sell to a rival.

John Varley, the group chief executive of Barclays, said: "This transaction realises 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 stand-alone basis. Barclays shareholders will benefit from a reinforcement of our capital base and an ongoing commercial relationship with iShares."

Bob Diamond, the Barclays president, will make £4.7m from the deal through his holding of 200,000 shares and 100,000 options in BGI. Around 200 other BGI staff also stand to receive a windfall from the sale.

Despite the dolorous market conditions, the proposal to sell iShares generated no shortage of interest when it was mooted last month. The price represents about 10 times iShares' earnings before interest, tax, depreciation and amortisation, and CVC saw off a number of other suitors including Bain Capital, Colony Capital and Goldman Sachs.

Barclays announced CVC as the preferred bidder the day after it rejected involvement in the Government's asset protection scheme (APS), which provides banks with insurance against potentially toxic assets held on their balance sheets.

Lloyds Banking Group and Royal Bank of Scotland are both taking part in the APS, paying the premium in B shares that have given the Government controlling stakes in both institutions. Barclays bosses, including CEO John Varley and chairman Marcus Agius, have staked their reputations on resisting state capital to keep control of their business and the Financial Services Authority signed off the group's finances last month. But the cash injection from the iShares sales secures Barclays' position, and is well timed for next month's AGM of shareholders, at which the whole board faces re-election.

Yesterday's iShares deal does not include the division's securities lending arm, which will remain within BGI. Had it been included in the deal, it would have raised a further £1.4bn. But private-equity investors proved wary of a business exposed to greater regulatory burden through its involvement in lending to hedge funds and others involved in short selling.