Barclays’ Index Unit May Sell For Much More Than $400 Million Asking Price

Earlier this year, Barclays (NYSE:BCS) put its index unit – Index Portfolio and Risk Solutions (IPRS) – on the block as a part of its organization-wide reform plan ‘Project Transform.’ ^[1] 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. ^[2] The unit’s sale was expected to bring in as much as $400 million when the process began in June. ((Barclays bond index unit hits market; may fetch $400 mln -sources, Reuters, Jun 20 2014))

IPRS has attracted bids from nearly every major player in the index industry, including Standard & Poor’s, MSCI, Markit, Bloomberg, Thomson Reuters and the CME Group. As the index and risk solution operations bundled as a part of the unit are likely to realize substantial cost synergies in the hands of existing market players, its acquisition value has jumped significantly, with recent reports indicating that IPRS may actually net more than $1 billion for Barclays. ^[3] This is great news for Barclays, which is now looking at a windfall gain even as it takes another important step towards scaling back its investment banking operations.

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 unveiled ‘Project Transform’ at the end of 2012 as a means to combat shrinking revenues and escalating costs (a large chunk of which were due to settlement-related expenses) since the economic downturn of 2008. A key part of this revamp was refocusing its investment banking operations, which houses the index business. The interest shown by several index providers 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. One of the factors helping Barclays demand a higher price for IPRS is the recent deal by the London Stock Exchange Group to acquire Frank Russell (a prominent player in the index industry) for $2.7 billion. ^[4] What remains to be seen over coming months is who finally lands IPRS, and for how much.

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1. Barclays Said to Plan Sale of Index Unit Valued at $400 Million, Bloomberg, Mar 19 2014 [↩]
2. Barclays weighs index unit sale after MSCI approach – sources, Reuters, Nov 19 2013 [↩]
3. Bloomberg, Markit Separately Look to Buy Barclays’s Index Unit, The Wall Street Journal, Aug 13 2014 [↩]
4. ref:4 [↩]