BGI And The Queen’s Corgis

Jim, the number of actors involved in the iShares/BGI sale makes this one a real cliff-hanger.Here are several factors to consider for those following the negotiations.

First, Barclays has until the end of the month to decide whether or not to participate in the government’s asset protection scheme. It can pay for its participation in the form of cash or shares – the latter route would probably mean the loss of the bank’s independence. As you put it so poetically in your first draft of yesterday’s blog, Jim, Barclays would become another one of the Queen’s female corgi dogs…

Complicating this, there’s what is, also poetically, known in the trade as a “death spiral convertible”, the anti-dilution clause that Barclays granted to its Abu Dhabi and Qatari investors in October. So when we read that the consortium possibly bidding for BGI includes Middle Eastern investors, it seems a reasonable guess that these two shareholder groups are at the negotiating table.

Then, and industry insiders told me yesterday that this is a key point to consider in the negotiations, staff own 5.9% of BGI, making the sale a big potential payday for senior executives and others. At the admittedly optimistic sale target price of £5 billion, you’re looking at a windfall approaching £300 million for these staff.

According to the FT, among the key shareholders at BGI are Bob Diamond, who owned 100,000 BGI options and 200,000 shares at the end of 2007 (the date of the latest filed accounts), San Francisco-based chief executive Blake Grossman, with 573,234 shares, Richard Grinold, with 248,067, and Rich Ricci, a trusted Diamond lieutenant, with 200,000 shares. Diamond pocketed £7.8 million in 2006 alone from the exercise of options in BGI, by the way.

In August last year BGI’s internal share options scheme – an extraordinarily generous one by asset manager standards (one analyst estimated that 78% of BGI’s overall profits for the first half of 2006 were paid out to fund the scheme, for example) – valued BGI shares at £87, which would make the asset manager worth £7.3 billion. As BGI executives have been able to cash in their options and sell the realised shares back to the parent bank at this internal valuation, the option scheme has been the source of considerable fortunes for some staff.

£7.3 billion would now represent the lion’s share of the whole bank’s value, if realised, and it’s likely that any sale would be at a much lower price. City analyst Alex Potter says Barclays will be lucky to raise half that figure in a sale of BGI, and in his view the asset manager will more likely fetch around £2 billion.

On the other hand, if the bank were to end up in government hands on March 31 as the result of a failure to sell BGI, it’s unlikely that these BGI shares will end up being worth much at all. So don’t underestimate the determination of certain insiders to push a sale through, Jim. The Queen’s pack of hounds may not be getting an addition to the kennels next month.

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