Barclays is to sell its Global Investors division (BGI) to the US giant BlackRock for $13.5bn (£8.2bn), creating the world's biggest asset manager and shoring up the UK bank's balance sheet.
Barclays will retain a 19.9 per cent stake in the new company – to be called BlackRock Global Investors – and will make a net gain of $8.8bn, to be used to protect it against any future losses from toxic investments.
BlackRock is financing the deal with $2.8bn in equity – reportedly from sovereign wealth investors including Kuwait, Singapore and China – and debt that includes $2bn from Barclays.
BGI's equity ownership plan will see 200 of BGI's 3,500 staff share a $1bn windfall. And Bob Diamond, the Barclays president, will net a whopping $36m for shares he paid $10m to buy.
The new group will have $27 trillion under management. Mr Diamond said: "The combination creates the strongest investment manager in the world by any measure – by geography, by products, by assets under management."
Both Mr Diamond and John Varley, Barclays' chief executive, will take seats on the board alongside BlackRock's chairman and chief executive Larry Fink.
Barclays' management are keen to stress the "strategic positioning" of the tie-up. Regulation has given independent asset managers the edge over their bank-owned counterparts in the past decade, according to Mr Diamond. The reduced ownership from the BlackRock deal will enable both Barclays Capital and BGI to "blossom in terms of business flows," he said.
Mr Varley said: "The combination represents an unusual strategic opportunity to bring together, at a time of competitive dislocation in the industry, two leading asset managers with complementary capabilities and complementary geographical footprints."
But it is the effect on the group's capital ratio that will draw the most attention. Unlike rivals Lloyds and Royal Bank of Scotland, Barclays has shunned the Government's Asset Protection Scheme – the insurance plan that has given the taxpayer a controlling stake in both other banks. But Barclays does need to strengthen its balance sheet.
The $8.8bn from the BlackRock deal will add 163 basis points to the group's equity tier-one ratio and 150 basis points to its core tier-one ratio, giving a pro forma equity ratio as at the end of December 2008 of 8.3 per cent and a core ratio of 8 per cent – up from the current 6.7 per cent. The price implies a multiple of 8.3 times BGI's pro forma 2008 earnings before interest, tax, depreciation and amortisation.
Although the capital from the deal will be used to strengthen the balance sheet "for the foreseeable future", Barclays is also looking to a future beyond the current sub-prime uncertainties.
Mr Varley said: "We have made the assumption that the capital being liberated here will be held to support capital ratios for a period of time, but we can turn that dial when we choose to. For the foreseeable future it will be held to capital ratios but when we think the moment is right then the scale of capital in the group does give us some optionality."
Yesterday's announcement was not met with unequivocal support. S&P cut BlackRock's rating by a notch to A-plus and gave the group a negative outlook due to re-financing risks for the $3bn of short-term debt needed for the deal.
And some City analysts are sceptical about Barclays' future without BGI. Sandy Chen at Panmure Gordon, noted that the UK bank is retaining cash fund assets that contributed to BGI's £346m loss in 2008. "The short-term benefits of the BGI disposal are obvious; our concerns are longer term, and relate to sustainability of the remaining group's earnings," Mr Chen said. "The remaining group will be highly exposed to the risks of increased dependency on the volatile earnings stream from BarCap and rising impairments on the lending businesses."
There is at least a theoretical possibility that the deal will not go ahead. In April, Barclays finalised the £3bn sale of BGI's iShares exchange-traded funds business to US private equity group CVC Capital Partners. CVC now has five days to come back with an offer trumping BlackRock's proposal. If not, Barclays will pay CVC a $175m break fee and the BlackRock deal will go ahead.
Fink's reign: Bond trader to bank boss
*Draw a long enough line and you can trace the carnage on the world's credit markets back to Larry Fink, below. The founder of BlackRock made his career and his first fortune as an ambitious young bond trader at the go-getting investment bank First Boston. That was where, back in 1983, he sold the first "collateralised mortgage obligation", a parcel of mortgages, sliced and diced in ways that were meant to make them less risky for investors.
Fast forward a quarter of a century and Mr Fink, 56, bestrides the fund management industry, a member of the Wall Street aristocracy and a go-to guy for governments around the world as they try to clean up the mess that derivations of his invention have unleashed. His firm is working for the Federal Reserve managing the portfolio of mortgage assets it owns as collateral from Bear Stearns; he signed up early to the Obama administration's public-private partnership scheme for buying banks' toxic assets.
Mr Fink, the fast-talking, hard-working son of a shoe-salesman, formed BlackRock as the investment management subsidiary of the private equity giant Blackstone, but his legendary falling out with that firm's founder led to its separation in 1992.