Two Fridays ago, John Varley left Barclays’ swish Canary Wharf headquarters
and was driven by his chauffeur to his west London home. Like most Fridays,
Barclays’ chief executive then got into his blue Mercedes estate and motored
down to his country retreat in Hampshire for the weekend.
March 16 was no ordinary Friday, however. Just hours beforehand Varley had
been told that Barclays was set to go into exclusive merger talks with ABN
Amro, its Dutch rival. ABN had long been in Barclays’ sights, but the
British bank had consistently been rebuffed despite several years of on-off
talks. Now, under fire from rebel shareholders for underperformance, ABN was
ready to talk.
By any measure Varley’s plan is audacious. A merger with ABN would probably be
the biggest-ever financial-services deal. It would transform Barclays,
propelling it from the world’s 15th-biggest bank to No 5. The combined
Barclays-ABN would be a goliath with a market value of almost £90 billion,
operations in 74 countries, more than 40m customers and 230,000 staff.
Bankers say Barclays has been smart, cleverly positioning itself as a white
knight to save ABN from the wrath of rebel shareholders. ABN has looked
increasingly vulnerable since it became embroiled in a battle with an
activist investor, The Children’s Investment fund (TCI), in late February.
In a vitriolic letter, TCI lambasted ABN’s management, attacked the bank’s
“terrible” shareholder returns and called for it to be sold or broken up.
In response, ABN hired four heavyweight investment banks — UBS, Lehman
Brothers, Morgan Stanley and Rothschild — to shore up its defences. TCI is
demanding five punchy motions be put to ABN’s annual shareholder meeting on
April 26.
Even before the TCI attack, ABN was under pressure from shareholders. Last
month, seeking to appease investors, it announced plans to spend €1 billion
buying back shares. Rijkman Groenink, its chief executive, has declared 2007
“a year of delivery”. Behind the scenes, however, ABN and its
investment-banking advisers have sounded out many of the world’s biggest
banks about a sale or a merger.
Few were prepared to buy the whole business. Barclays and ING, the largest
bank in the Netherlands, proved to be the exception. Talks with ING
collapsed last week.
Barclays is understood to have been in renewed exploratory discussions with
ABN for several months. Well-placed sources say that Varley and Groenink met
in the two weeks before news of the talks leaked. The two banks have since
acted swiftly — evidence that they had already broadly agreed the structure
of a deal.
Barclays agreed to move its head office to Amsterdam and allow ABN to appoint
a new chairman if the deal goes through. Controversially, it also agreed
that the Dutch central bank will lead regulation of a combined group.
In return, Barclays shares will continue to be listed in London and Varley
ensured he will have management control. As chief executive of the combined
group, he will have the power to name his executive team, which is almost
certain to be drawn from Barclays’ top echelons.
So does the deal stack up? Last week most analysts agreed it makes strategic
sense. By gobbling up ABN, Barclays gets access to fast-growing markets such
as Brazil and to attractive assets in Asia with more than 2.8m customers and
a strong credit-card business. ABN also has one of the world’s leading
asset-management groups and a sizeable corporate and investment-banking
business.
“These opportunities do not come up more than once in a decade. If you are a
chief executive it is hard to let this pass you by,” said Antony Broadbent,
an analyst at Sanford Bernstein.
INTERNATIONAL expansion has been central to Barclays since Varley landed the
top job in 2004. In his first strategy board meeting as chief executive he
made it a priority. Two years ago he set a strategy to compete with the
world’s top five banks. He also set a target of making 50% of profits from
outside the UK by 2008, up from 40% in 2005. In the event, it beat that
target last year.
Last year he hired Frits Seegers, a former Citigroup banker, in the newly
created role of chief executive of global retail and commercial banking on a
potential package of £11.7m over three years. Part of Seegers’s role is to
use his experience to drive Barclays’ retail business into new
markets, including Russia.
Varley is understood to have set the bank a new target of generating 70% of
its profits from overseas. According to an insider, merging with ABN would
accelerate that by three years. Broker Cazenove estimates Barclays-ABN would
rely on its British businesses for a mere 32% of profit.
The big question is what price Barclays can pay. This will depend on the
amount of costs Barclays can squeeze out and the extra revenues it can gain
by selling invest-ment-banking and fund-manage-ment products to ABN
customers.
The return Barclays calculates it can get on its investment will also be
crucial in gaining shareholder support. The fact that any offer will be
largely in Barclays shares makes it vital that Varley retains shareholder
confidence.
Fund managers are sitting on the fence. “We would be very concerned if
Barclays does anything to destroy shareholder value. The deal makes sense,
but until we see the price we really can’t make a proper judgment,” said one
leading shareholder.
Most analysts calculate that Barclays can probably offer about €33 a share on
projected cost reductions of €1.55 billion; but Stuart Graham at Merrill
Lynch is more bullish, forecasting a €3 billion projected cost reduction and
a €35-a-share offer price.
There is little geographic overlap between the two banks, however, which
limits the scope to slash costs. This also leaves Barclays at a disadvantage
to rivals such as HSBC, which could pay €48 a share, according to Merrill
Lynch. Santander, BBVA, Royal Bank of Scotland (RBS) and BNP are all seen as
being better placed to make a higher offer.
“It is not clear to us that Barclays can offer the highest price for ABN among
other potential suitors. That said we recognise that factors such as
cultural fit will have to be considered by ABN,” said Graham.
At €33 a share, the offer would be a decent 20% premium to the ABN Amro share
price on March 16, the last trading day before the talks were announced.
Since then Barclays has suffered in the relative value of its shares. ABN’s
shares have jumped by 20% to €32.5 while Barclays’ stock is up just 11%,
making it more expensive for the British bank to fund a share-based deal.
THERE are other options open to Barclays. One could be to sweeten the deal by
selling off parts of ABN and returning large amounts of cash to
shareholders. LaSalle, the American bank, is a favourite target; analysts at
Sanford Bernstein estimate it could be worth €11.3 billion. Possible buyers
of LaSalle could include RBS and Bank of America. Barclays could also sell
off ABN’s stake in Capitalia, the Italian bank.
Even if Barclays can pull off the deal — and most analysts in the market
believe there is only a 55% chance — it faces further challenges.
“ABN Amro has been an unloved franchise and it is not easy to turn around. Any
bank looking at this knows there are difficulties,” says one senior banker.
Tellingly, ABN’s cost to income ratio, a key measure of efficiency, is 69.6%
against a much more lean 59% at Barclays.
In one sense success could come down to management. In the past two years,
Varley has shaken up his top team. Besides Seegers, he has brought in Deanna
Oppen-heimer, a highflying American banker, to pep up the ailing retail
bank, and Antony Jenkins, another American, to run Barclay-card. All come
highly rated, but taking on a huge integration project on the scale of ABN
is fraught with difficulty.
Bob Diamond, Barclays’ president and architect of the phenomenally successful
investment bank Barclays Capital, will play a key role. He is expected to
have responsibility for fixing ABN’s loss-making wholesale banking business.
But some analysts fear this could result in Diamond taking his eye off the
ball and Barclays Capital suffering. “While Diamond has been good at driving
BarCap forward, we would worry about the distraction of having to integrate,
fix and, in all probability, shut large amounts of the ABN Amro investment
bank,” said Broadbent.
The most intriguing question is whether a rival bidder emerges. Most possible
pred-ators are expected to wait on the sidelines until Varley declares his
hand.
One potential bidder could be Citigroup, the American financial-services
giant, where a faction is said to be putting pressure on chief executive
Chuck Prince to make a bid.
Last week RBS refused to rule itself out as a potential suitor for ABN. If
either Citigroup or RBS moves, others may be tempted to follow, creating a
bidding war.
INVESTOR WHO GOT TOUGH
THE Children’s Investment Fund (TCI), has made a profit of more than €132m
(£89m) from its original €500m investment in a 1% stake in ABN Amro.
On February 21 TCI, run by activist investor Christopher Hohn (pictured
below), sent its now famous letter to Arthur Martinez, chairman of ABN,
attacking the bank’s management. Since then the shares have soared from
€25.7 to close last week at €32.5, a rise of 26.4%.
TCI’s letter had an electric effect, driving the ABN shares up by 8.7% in just
three trading days.
TCI is demanding that ABN puts five motions to the Dutch bank’s annual
shareholder meeting on April 26. ABN has until March 30 to decide on whether
to put the motions to the annual meeting.
The motions ask shareholders to vote on: the break-up of the bank; a complete
sale of the bank; management reporting back to shareholders on the progress
of the break-up negotiations within six months; and management ceasing to
pursue acquisitions.
Hohn and TCI have established a reputation as the scourge of underperforming
continental groups.
He came to prominence in a brutal battle in 2005 with the management of
Deutsche Börse, the German stock market.
TCI eventually rallied investors to thwart Deutsche Börse’s plan to take over
the London Stock Exchange, ousting the German group’s chief executive,
Werner Seifert.
The affair made Hohn a hero in the London hedge-fund community, although its
strategies typically involve investing for the long term.
TCI was set up in 2003 by Hohn and a small group of investment managers. It is
unusual because it gives a share of its earnings to charity.
The money flows through The Children’s Investment Fund Foundation, run by
Hohn’s wife, Jamie Cooper-Hohn.
