Barclays Adds Another ‘Egg’ to its Basket
Barclays (NYSE:BCS) announced earlier this week that it intends to acquire Egg’s UK credit card assets from one of its biggest competitors – Citigroup (NYSE:C). [1] Barclays also competes with The Royal Bank of Scotland Group (NYSE:RBS), Bank of America (NYSE:BAC), UBS (NYSE:UBS) and JPMorgan Chase(NYSE:JPM).
The deal would give Barclays approximately 1.15 million credit card accounts, and the acquired assets would be integrated as a part of the group’s Barclaycard division in the first half of the year.
Our price estimate for Barclays stands at $18.30, a roughly 5% discount to market price.
What Exactly is Egg?
Egg Banking is the world’s largest bank which operates completely over the internet, or via call centers. Egg specializes in borrowing, saving and insurance. [2] It was established as a part of Prudential in 1996, and was taken over by Citigroup in 2007 – just before the global economic downturn. [3]
Citigroup will only be transferring the 1.15 million credit card customers to Barclays, while retaining the brand name and other products including savings, insurance and loans. [4] Citi’s decision to sell-off Egg comes as a part of their initiative of exiting non-core businesses after the U.S. government bailed them out during the economic crisis.
Will the Deal Really Help Barclays’ Value?
Neither Citibank nor Barclays have disclosed the exact value of the deal. The only information provided is that the deal “has been priced at a significant discount to gross receivables”. The gross receivables value for Egg’s credit card accounts is about $3.75 billion. While Citibank expects an after-tax profit from the transaction, Barclays expects the addition of the new accounts to increase its returns.
To try and understand what would be a fair price for the deal, we first need to estimate how the deal would affect various forecasts in our analysis model for Barclays. We believe the deal would most significantly affect the assets held by Barclaycard and the net interest margin for the Barclaycard division.
As the assets for the division would increase by at least $3.75 billion at the end of this year, representing an increase to our base estimates from $49 billion to more than $53 billion for this year.
Also, if Barclays’ return on assets actually does increase, this would cause a revision in the net margin – adding at least 1% to our current estimate.
See our full analysis and $18.30 price estimate for Barclays
Both these factors taken together add-up to an increase in almost $900 million in market cap for Barclays – or an increase to our $18.30 price estimate of just under 2%. All-in-all, we believe that would be a fair value for the deal.
Barclays is a London-based global bank that provides consumers, corporations, governments and institutions with a broad range of financial products and services. It has a strong presence in the U.K. retail and commercial banking industries, and is currently focusing on achieving greater depth in its businesses.
Notes:- Barclays to acquire Egg’s credit card assets, Barclays Press Release, March 1 2011 [↩]
- About Egg, Egg, 2011 [↩]
- Prudential sells Egg to Citigroup, BBC News, Jan 29 2007 [↩]
- Egg customer? Not for long, DailyMail, March 1 2011 [↩]