What are we missing in the Barclays/ABN courtship? Merrill Lynch for one thinks there must be something else going on. Their initial take on the talks between the two banks was that, leaving aside the PR friendly “merger” chat, was that ABN shareholders looked to be getting a control premium, paid for in undervalued Barclays stock, and a share of the ongoing synergies of the combined group. “To us, this is a situation of having one’s cake and eating it too,” they say.
But “having set out our position, we must confess to being slightly perplexed,” writes John-Paul Crutchley, the UK banks analyst. “Reported comments in the press from Barclays indicate that shareholder value and economic profit remains the cornerstone of their thinking. Moreover with the transaction apparently being driven by Bob Diamond, Nagib Kheraj and Marcus Agius, Barclays President, former CFO and Chairman respectively, each of whom are some of the leading financiers of their generation, we think that they will be unwilling to produce a deal that has a high risk of failure or of generating shareholder dissatisfaction.”
So what’s the missing link? Barclays cannot rely simply on higher synergies to make the deal work for its shareholders. If the UK bank is paying a control premium for ABN, the only way to sweeten the package for Barclays investors is to curtail the ABN shareholders participation in the merged entity, the report goes on.
” To this end, we find it interesting that the only formal announcement from Barclays, other than the confirmation that discussions are occurring was to announce that the Head Office and Lead Regulator would be Netherlands based. We are aware that Netherlands corporate law allows for differing classes of equity. This might give Barclays a financing option which may not be available to
other bidders who are less willing to either relocate their domicile or submit themselves to a Netherlands based regulator.”
The prospect of a rival bidder has increased since the Dutch central bank over the weekend told the FT that it would not object in principal to a bid from a foreign group that wanted to buy ABN in order to break it up. Investment bankers believe, for example, that RBS could afford to pay more for ABN, if it then sold the bank’s Brazilian operations to another lender, such as Spain’s Santander.
Merrill’s chaps hypothesise that Barclays could finance the transaction through the issuance of new class of equity, call them ‘B’ shares, with these shares non-participating but carrying a fixed dividend rate. They assume that these ‘B’ shares effectively finance the goodwill arising on the buy, while Barclays issues new shares via a rights issue to its own shareholders to fund the running of the enlarged group.
Financing a deal in this fashion, would give ABN shareholders a cash equivalent instrument at the time of the deal closing but limits their participation in the combined entity.
“While it would be unprecedented for a banking M&A transaction to be financed in this manner through issuance of “B” shares, it would provide a firm valuation on ABN AMRO which would not be dependent upon Barclays share price through an exchange ratio,” says the report.
