Barclays’ Decision To Sell Index Business Complements Investment Bank Revamp
Barclays (NYSE:BCS) is reportedly seeking buyers for its index unit – Index Portfolio and Risk Solutions (IPRS) – with plans to divest the unit later this year. [1] The move is an attempt by the U.K.-based banking group to arrive at the best selling price for the profitable unit which has had MSCI (NYSE:MSCI) as well as CME Group express interest late last year. [2] The sale of the index business would also be an important step for Barclays towards scaling down its investment banking operations as a part of the continued reorganization plan it detailed last month.
Indices provided by IPRS are tracked by exchange-traded products and mutual funds managing about $2.3 trillion in assets, making the index unit second only to Standard & Poor’s (S&P) in the industry. A sale of the unit could bring in as much as $400 million for Barclays.
We maintain a price estimate of $18 for Barclays’ stock, which is about 10% ahead of the current market price.
See our full analysis for Barclays’ stock
Barclays has had a rather poor run the last two years, with the banking group reporting a loss in 2012 and barely staying out of the red in 2013. Shrinking revenues coupled with escalating costs – a large chunk of which were due to settlement-related expenses – forced the bank to unveil its organization-wide reform plan dubbed ‘Project Transform’ at the end of 2012. But with the outlook not improving significantly in 2013, the bank announced deeper cuts in its business model last month with an estimated reduction of 12,000 jobs (9% of its global workforce) over the coming years (see Barclays Steps Up Cost-Cutting Measures After Poor Q4 Showing).
A key part of this revamp is refocusing its investment banking operations, which houses the index business. [3] The interest shown by several index providers in IPRS presents an opportunity for Barclays to take an important step towards trimming its investment banking business. The revamp in itself is aimed at improving the investment bank’s operating margins in the future, as we forecast in the chart below.
Barclays acquired a significant part of the index unit as a part of its addition of Lehman’s businesses at the peak of the economic downturn. The strong market position of IPRS makes it a desirable purchase for several index providers who have been looking to consolidate their presence in the industry – particularly MSCI. With Barclays finally deciding to invite bids for the unit, it remains to be seen who actually wins IPRS, and for how much.
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Notes:- Barclays Said to Plan Sale of Index Unit Valued at $400 Million, Bloomberg, Mar 19 2014 [↩]
- Barclays weighs index unit sale after MSCI approach – sources, Reuters, Nov 19 2013 [↩]
- Barclays to shake up investment bank, Financial Times, Mar 13 2014 [↩]