City commuters trudged into London’s Liverpool Street station through a
freezing drizzle last Thursday evening, oblivious to the drama being played
out high above their heads. In a suite of conference rooms inside the chic
new headquarters of the law firm Allen & Overy, which tower above the
station and the historic Spitalfields market nearby, the future of Barclays
bank was in the balance.
A team of eight bankers from Goldman Sachs, led by their European chief
operating officer, Glen Earle, was hammering out the final details of a
multi-billion pound capital injection by Gulf investors, one they hoped
would carry the bank safely through the financial crisis.
The donors were two Arab royal families, the ruling elite of Abu Dhabi and
Qatar. Steering the talks was Amanda Staveley, the former girlfriend of
Prince Andrew who has become a crucial go-between for big business and Gulf
investors, acting during the takeover of Manchester City football club and
other big deals. Barclays executives were on call via secure internet and
phone connections.
Failure was unthinkable. A fortnight earlier, Barclays had snubbed a
government offer of cash, saying it could go it alone to raise the money it
needed. It was a high-risk strategy, one that was likely to alienate
existing shareholders and leave the bank open to the charge that it was
doing anything it could to keep its generous remuneration scheme for top
executives in place.
After hours of negotiations, the final documents were ready. At 6.15am on
Friday morning, Staveley and Ali Jassim, close friend and trusted adviser to
Sheikh Mansour Bin Zayed Al Nahyan of Abu Dhabi, went to see John Varley,
Barclays’ chief executive, to show him what had been prepared, ready for an
announcement to the London Stock Exchange 45 minutes later.
All was ready to go - until an eagle-eyed adviser spotted a crucial error. The
name of one of the key investors who was taking a 16% stake had been
misspelt. It was a grave mistake, and might have been taken as an affront.
The documents were hastily corrected and reprinted, and Barclays made the
announcement at 7.30am.
Varley had his money, and he had it before his three big British rivals -
Royal Bank of Scotland, HBOS and Lloyds TSB. He believes the benefits of
drawing on the Gulf money outweigh the risk of upsetting some of his key
institutional investors.
“In markets as volatile and as unpredictable as this, there are significant
risks in being at the back of the queue in raising capital,” said Varley.
“We had the opportunity of raising it and it was in the interests of the
group and the shareholders to do it quickly and in size.”
This week Varley will start urgent talks with his shareholders to sell the
merits of the fundraising and explain the benefits of having access to a new
pool of capital in the Gulf. One analyst said: “The bank clearly wants to
align its investor base with its global ambitions.” FOR Staveley, the deal
marks her ascendancy into the premier league of dealmaking. Just weeks ago
she and her firm PCP Capital Partners, an advisory boutique, brokered the
takeover of Manchester City, but Barclays is in another league.
Her firm will earn commission of £110m from introducing the deal, and after
paying off other advisers, she will be left with £40m.
The payday marks the end of a long investment. She was running a restaurant
called Stocks in Newmarket when she started mixing with powerful Middle
Eastern families.
Six months ago she began talking to Sheikh Mansour about investment
opportunities in British banking. The sheikh had watched other Gulf
investors move too swiftly only to lose money on their investments. The
sheikh wanted to bide his time. When Barclays announced another fundraising
three weeks ago after the Financial Services Authority said all banks needed
to raise their capital ratios, the duo got in contact with Varley. Goldman
was later brought in to complete the process.
The timing was perfect. The Arabs knew Barclays needed the cash swiftly and as
the days ticked by they increased the pressure over the terms. Barclays got
its money, but at a price, and it is that price which has caused such a
backlash with its British investors.
“This is a management that doesn’t listen to its shareholders,” said one big
shareholder in Barclays. “We told them not to bid for ABN Amro, but they
went ahead and tried in any case. We told them to be careful of preemption
rights (the City tradition that gives existing shareholders the first chance
to contribute to new fundraisings) and now they have gone and trampled all
over that.
“The trouble is we don’t have much of a choice. Clearly they would have
struggled to raise all of the £7 billion from their existing shareholders.
That leaves you asking which is cheaper - government money or Gulf money?
Those were the only two options they had.”
And Barclays, which recently bought the American operation of Lehman Brothers,
did not want to go to the government. It is desperate to maintain its
commercial freedom and does not want to hold back on its ambitions to become
a global bank.
The task of raising the capital fell to Roger Jenkins, the chairman of
Barclays Capital’s investment-banking operation in the Middle East. His
first call was to Sheikh Hamad bin Jassim bin Jabor Al Thani, head of Qatar
Holding, and a personal friend. After explaining the new situation, he soon
had a commitment that Qatar would put up at least £1 billion in the
refinancing.
While Royal Bank of Scotland, HBOS and Lloyds TSB were subsequently forced to
sell large stakes to the government, Barclays insisted it could go it alone.
Its rivals have been carping ever since, questioning why the authorities
allowed it to stay out of the government scheme.
Now shareholders are asking why the bank chose not to join the government
scheme, given the terms that have been struck with the Gulf investors. The
preference shares the government offered to buy last for five years and pay
an interest rate of 12%. The instruments being sold to the investors from
Qatar and Abu Dhabi have a 10-year duration and pay an interest rate that
works out at about 13% after tax deductions and other factors come into
consideration.
The second tranche of funding through convertible bonds is priced at a 22.5%
discount to Barclays’ heavily-depressed share price - the bank’s shares have
slumped 65% in the past year.
The overall fees on the £7 billion deal came to a whopping £300m.
Investors are annoyed that they were not offered the chance to invest on equal
terms, eroding preemption rights that are sacrosanct in the UK market.
However, the same investors showed little appetite for the element they were
allowed to take up. Late on Friday, Barclays said that existing shareholders
had bought only £1.25 billion of the £1.5 billion in convertible notes that
they had been offered.
The terms of the deal sent Barclays shares into freefall on Friday, closing
the day at 179p, 13% down. Barclays remained unrepentant.
“I think the share price reaction has been a bit harsh,” said Jenkins. “It has
been a tremendous success to raise this capital at all in the current
environment.”
On Friday night, a group of about 15 people involved in the deal, including
Staveley and Sheikh Mansour, celebrated by partying into the small hours at
Annabel’s, the Mayfair night-club. Meanwhile, Barclays shareholders were
growing ever more irate.
“It is very expensive and much more dilutive than we had expected,” said one
senior fund manager at a large UK investment house. “We have stuck with
every capital raising and put more good money behind them [Barclays] every
time and now they do this. It is pretty galling really.
“The question we will be asking is why are they doing this now. If we don’t
get answers we will be looking at how we change our preferences within the
banking sector.”
Another top 10 shareholder in Barclays said: “It’s all very laudable to try to
avoid selling shares to the government but that seems to be coming at a
significant cost, particularly when you look at the fees that are being
paid.” FOR Barclays it marks another transformation of its shareholder
register and it is one that is moving east to where the capital and new
economic power lie. The horseracing and football-mad Sheikh Mansour, 38,
will end up controlling 16% of the bank. He is married to the daughter of
the ruler of Dubai. He is also the half-brother of the president of the
United Arab Emirates and ruler of Abu Dhabi, and brother of the Crown Prince
of Abu Dhabi, which makes him one of the most influential sheikhs in the
Gulf.
He is chairman of the Abu Dhabi Petroleum Investment Company and chairman of
First Gulf Bank, one of the region’s fastest-growing financial institutions.
The other two big investors will be Qatar Holding and Challenger, a company
representing Sheikh Hamad bin Jassim bin Jabor Al Thani. Qatar will control
13% of Barclays and Challenger 3%.
It is expected the three new investors will ask Barclays for a new
non-executive director to be appointed to protect their interests.
Barclays argues that the deal is partly about finding new business
opportunities.“The things that we are good at in our investment arm Barclays
Capital play well with the needs of the Middle East,” said Jenkins. “We are
already the biggest issuer in the world of sukuks - Islamic bonds. We are
doing a lot of business in the region. Now that we have the merger and
acquisition franchise of Lehman Brothers, we have a more complete package.
“We’ll be opening an office in Abu Dhabi and another one in Riyadh in Saudi
Arabia. I would expect to see both of those open by June 2009. We’ll be
looking to see if there are any of our large corporate clients that we can
introduce to our clients in the Middle East. You may see us help
multinationals set up factories in the area, that type of thing.”
This is the vision that Barclays wants to pursue, but Varley’s first job is to
ensure that he can sell it to his British investors. They have remained
loyal to him through some difficult times and he does not want to alienate
them now.
