What is Bob Diamond playing at, and does he know something we don’t? On Monday in New York, even as he tried to talk up the performance of Barclays’ investment banking arm so far this year, he told investors that the UK bank’s cash-and-shares offer for ABN Ambro was likely to be beaten by the rival mostly-cash €70bn (£48bn) bid by a Royal Bank of Scotland-led consortium – unless, he said, market conditions prove too difficult or regulators intervene.
A steep slide in share prices in recent weeks means that Barclays offer, which is 37 per cent in cash, is currently about €12bn less than the bid from the consortium, which is 93 per cent in cash, notes The Scotsman on Tuesday, adding that Fortis, one of RBS’s two consortium partners, still needs to raise €13bn through a share issue to pay for its part of the ABN bid.
“The bad news is if the consortium still wants to pay that price, if it’s comfortable with the risks on the balance sheet during the turmoil, if they can raise that money in the market and if the regulators are going to allow . . . this kind of complex transaction, then that price will probably beat ours,” Mr Diamond said.
“But there are a lot of ifs between now and then. We have to take into context that the market environment has changed. Do we still want ABN? Yes.”
There is not much time for “a lot of ifs” before the rival offers are due to expire on October 5, for RBS, and October 4 for Barclays; and meanwhile, the Dutch minister of finance is in the next week expected to indicate whether the consortium’s offer can go ahead.
Barclays’ investors, clearly didn’t know what to think, sending the banks’ shares up in London immediately after Mr Diamond’s presentation, and then driving them down to close 2½p lower at 580p following a late sell-off in the markets. (On Tuesday morning the price bounced back above 590p.)
The Times, which reported on Tuesday that Diamond’s comments came close to conceding defeat in the race for ABN, notes that speculation has begun to circulate over whether RBS, whose deal was agreed at the height of the M&A boom, may try to lower its €38-a-share bid, which is trading at a significant premium to the ABN share price.
“Sources have said that it is possible for the consortium, which also includes the Belgian-Dutch Fortis and Santander, of Spain, to invoke a so-called material adverse change clause (MAC) to lower its price, although they said that so far there had been no discussions to do so,” said The Times.
Lex, meanwhile, notes that while the RBS-led consortium is in pole position to win the ABN bid battle, raising the capital is looking trickier – and more expensive – by the day.
But the bigger challenge is likely to be raising the roughly €10bn of tier one capital in the form of preference shares needed by RBS and Fortis (about €5bn each). Bank issuance of pref shares, which offer an attractive means of meeting regulatory capital requirements, reached a record €64bn globally last year, according to Dealogic.
Even before recent market ructions, the consortium’s pref share target “looked a very large bite,” adds Lex:
But institutional appetite has dwindled after the subprime crisis: spreads over Libor have more than doubled as a result. The US retail market remains open, indeed rival bidder Barclays itself raised $1.2bn of prefs there last week. Quite how deep that market will prove is debatable, particularly if it becomes one of a shrinking number of options open to banks keen to bolster their balance sheets following recent travails.
That makes it harder to estimate how much the consortium’s costs are likely to rise, notes Lex.
Staggering pref issues is one tactic, and both RBS and Fortis appear to have some leeway from regulators regarding how quickly they must rebuild their capital ratios. Perhaps some of the hedge funds with big bets on the ABN deal being completed may be willing to buy some attractively priced pref shares to help it on its way.