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In an effort to meet the Basel III capital requirements and boost profitability, Barclays PLC (BCS - Snapshot Report) has decided to sell its 19.6% stake (about 35.2 million shares) in BlackRock Inc. (BLK - Analyst Report). The company will dispose approximately 26.2 million shares of BlackRock in an underwritten public offering at a price of $160.00 per share. Additionally, BlackRock would buyback nearly 6.4 million shares for $1.0 billion.
With regard to the public offering, the underwriters – Morgan Stanley (MS - Analyst Report), BofA Merrill Lynch, a unit of Bank of America Corporation (BAC - Analyst Report), and Barclays Capital Inc. – have a 30 days option to purchase extra 2.6 million BlackRock shares from Barclays. If the book-runners fully exercise their options, the company will completely exit from BlackRock.
Barclays will receive net proceeds of about £3.5 billion ($5.5 billion) from the abovementioned stake sell. The net gain from the sale, which will be recognized in the financial statement, would be about £0.2 billion ($0.13 billion). Though the disposal of shares would have no material impact on the company’s net income, it would lead to a 0.05% increase in its core tier 1 ratio.
The Story Behind
Following the divestiture of its ETF and investment fund unit, Barclays Global Investors (BGI) to BlackRock in December 2009, Barclays had received BlackRock shares as a part of sale consideration. BlackRock had paid 37.6 million common and preferred shares along with $6.65 billion in cash to Barclays for buying BGI.
At that time, Barclays was in need of capital due to the financial crisis, and the disposal of BGI provided the much needed stability to its balance sheet. However, in September 2011, the company wrote down its investments in BlackRock to a fair value of £3.4 billion ($5.3 billion).
BlackRock Stake Sale in the Past
In November 2010, Bank of America and PNC Financial Services Group Inc. (PNC - Analyst Report) sold $8.3 billion worth of stock in BlackRock. Of the combined 51.1 million shares sold, Bank of America contributed 43.6 million and PNC the rest. The shares were priced at $163.00 each. A substantial part of this disposal was taken up by Japan-based Mizuho Financial Group Inc. (MFG - Snapshot Report).
Bank of America, which held 34% stake in BlackRock, had obtained this stake as part of its acquisition of Merrill Lynch & Co. in 2009. PNC Financial’s 24% stake dated back before 1999, when BlackRock went public.
Barclays’ decision to sell stake in BlackRock and focus on its core operations is expected to help management meet its ROE target of 13%. For 2011, the company had reported ROE of 6.6% compared with 6.8% in 2010.
Moreover, with this step, Barclays will be able to deploy capital by investing in its franchise, leading to a growth in top line. Also, the stake sale would help the company to mitigate capital constraints, which it would have faced under new regulations.
For BlackRock, the disposal will remove an overhang on the stock and provide it with more financial flexibility. Following the closure of this sale, PNC Financial would remain one of the largest institutional stakeholders in BlackRock with 21% stake.
Currently, Barclays retains a Zacks #2 Rank, which translates into a short-term Buy rating, while BlackRock retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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