In a press release early Monday morning, Barclays (NYSE:BCS) announced its decision to get rid of its entire stake in Blackrock (NYSE:BLK).  The largest British bank owns a 19.6% stake in the global asset management firm valued at nearly $6.1 billion based on the latter’s current market price. BlackRock has agreed to buy back shares worth up to $1 billion, and the remaining stake will be offered through a listing at either the London Stock Exchange or New York Stock Exchange. Barclays Capital, Morgan Stanley (NYSE:MS) and Bank of America-Merrill Lynch (NYSE:BAC) will play the role of joint bookrunners for the offering.
We maintain a $15 price estimate for Barclays’ stock, which is almost 35% above its current market price. We attribute this difference to the significant decline in the bank’s share price over the past few days as investors are gripped by a fear of Greece exiting the euro, and the potential impact of this move on the European banks.
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Barclays acquired the stake in BlackRock in exchange for Barclays Global Investors in June 2009. As seen in the chart above, we estimate that BlackRock’s stake contributes to just about 15% of Barclays’ total value.
The decision by Barclays to exit this stake is clearly a result of increasing pressure by British regulators on it to increase its capital reserves. And the fact that weak capital markets forced a write-down in a £1.8 billion ($2.8 billion) write-down in the value of the stake for Q3 2011 – with a good chance of another write-down in Q2 2012 – would have prompted the quick action on the stake sale.
We, however, have our reservations about this move, and believe that the expected going price of around $6 billion is much below what the stake is actually worth. Our analysis of BlackRock values its stock at $217 apiece. This translates to a value of just under $7.6 billion for the 19.6% stake. This implies that the current sale price undervalues the stake by around 20%. That, coupled with the fact that Barclays really has no need for immediate cash, makes us wonder if there are no better options for the bank to explore to help boost its capital ratio.Notes:
- Barclays announces intention to dispose of BlackRock holding, Barclays Press Releases, May 21 2012 [↩]