KBWBarclays has announced the purchase of Lehman Brothers’ North American investment banking and capital markets operations for £140m, together with property assets for around £0.8bn, taking the total consideration to c£1bn.
There will also be a £0.6bn share issue supported by ‘certain’ shareholders. We have to make a number of assumptions at this stage, but it looks to be around 24p accretive to 08E NAV and would add around 0.4% to the core capital ratio. There are, however, a number of unknowns, including the underlying quality of the assets being acquired and any associated restructuring charge.
Merill
We think the near term impact is likely to be positively viewed. Barclays appears o have avoided buying any of the legacy assets in structured credit and commercial real estate, which was a concern over the weekend; it has paid a relatively low price to achieve a change in scale in its US operations; and the immediate capital impacts are positive.
In addition, the deal is likely to be accretive to earnings quite quickly, although we currently have no details on the earnings power of the businesses acquired.
Longer term, however, we think the market will question the strategic rationale of the deal, because it moves Barclays back in the direction on investment banking at a time when we had been expecting more of a focus on retail.
On our current 2009 numbers, Barcap represents 26% of profits, and 46% of RWAs. If we assume that the 10,000 new Lehman employees can produce the same level of net income per employee as the current 16,000 Barcap employees, it would take Barcap up to 37% of group profits.
Cazeonove
The issue of £0.6bn of new equity plus the purchase of assets at a discount adds £2.4bn to equity tier 1. We estimate that on acqusition the deal will add £8bn of RWA and therefore on completion, the equity tier 1 ratio rises by 50bp.
In our view this acquisition has the potential to be transformational for Barclays. The risks of the transaction are substantially lower than if an entire business had been acquired. The primary challenge is for the group to generate sufficient capital to fund the ongoing and now larger capital commitments with this acquisition.
MF Global
The deal makes very good sense financially. Barclays will book some USD3.6bn in negative goodwill and will issues some USD1.0 billion in equity. The terms and timing have not yet been communicated, but the issue is supported by Barclays’ shareholders.
We estimate that this transaction increases Barclays core tier 1 ratio by 50bp to 6.7% by year end 2008, assuming USD15bn in RWAs. On a more important note, we believe that Barclays received the green light from the regulators to pursue Lehman.
It also received the go ahead to make an acquisition in emerging markets and were able to substantially boost mortgage market share in the UK during H1 2008. Consequently, we believe the regulator is certain that Barclays is safe, otherwise it would not be allowed to do all three things in a time of crisis.