Could Barclays’ iShares division really fetch £5bn?
Following confirmation that several “parties” are interested in iShares , analysts have been crunching the numbers to come up with a value for the business.
The spin in the weekend press, was that iShares, one of the world’s leading ETF (exchange-traded funds) mangers, could be worth between £3bn-£5bn. To put that figure in context, the current market value of Barclays is £7bn.
With $325bn of assets under management at the turn of the year, Alex Potter of Collins Stewart said iShares would probably fetch a lot less than £3bn.
This is a lower revenue margin business than BGI s active assets but also a lower cost business meaning it could easily be one-quarter (or more) of BGI s profits, or 3-5% of Barclays group. There are few good comparator deals done recently. Aberdeen-CSAM was at 0.6% of AuMs, implying £1.4bn but this is a very different business. If we assume the business accounts for around 25% of BGI (probably conservative), then it made c.£110m net profit in 2008. A mid-teens earning multiple would push the purchase price a little higher. This would be 10-12p per share at group level meaning you are losing <5% of profits at a value of >10% of current price.
Another analyst, who did not want to be named, agreed. He reckoned the iShares was worth 0.5 per cent of assets under management, or £1.2bn.
Meanwhile, Sandy Chen of Panmure Gordon described the £5bn price tag as a bit steep.
The iShares business is a relatively small part of BGI, accounting for £226bn of the £1,040bn of AUM as at end-2008. iShares probably accounts for over half of the BGI profit contribution, given that its margins are much better than those at the traditional indexed funds (our estimates are 25-30bp versus 5-7bp), but even with the assumption of solid profitability a £5bn price tag for iShares seems quite steep. There is also the issue of the shares and share options in BGI held by BGI employees; this would seem to make a disposal of BGI as a whole more likely.
And Jonathan Pierce of Credit Suisse agreed.
More press speculation on a potential sale of parts or all of BGI over the weekend and today. Specifically, The Telegraph suggests that iShares might be sold to US investors for around £4bn, although it also suggests that the entire BGI business might be sold to Middle Eastern investors, who would then sell iShares on. The figure put on iShares looks high to us. This business accounts for about 22% of BGI AuM and if we assume it generates twice the commission level of BGI as a whole (i.e. 36bps – compared to a weighted average of 40bps if you use data (http://uk.ishares.com/fund/overview.do) we estimate it would generate something like £200-300m profit after tax. A £4bn price tag is not out of the question, but it would imply a multiple in the teens.
However, Cazenove, one of Barclays’ brokers, was more positive. It estimated that iShares generated profits of £385m last year.
In 2008, iShares accounted for 45% or £830m of BGI’s revenues (£1,844m); the profit contribution has not been disclosed but taking the division’s underlying cost/income ratio of 53.5% (excluding liquidity support provisions) suggests a pre-tax profit of c.£385m, or 12% of underlying 2008 pre-tax profits.
As such, it could see how the business might be worth in excess of £3bn.
The weekend press reports the proceeds could be between US$5bn and US$6bn (£3.6bn to £4.3bn), which is 154bp to 185bp of the US$325bn AUM, and we estimate is equivalent to an historic PER of 13.0x to 15.5x.
MF Global was in agreement
The sale of iShares could raise GBP4bn or 1.8% of assets under management – We estimate this would improve core capital by up to 60 bp – This would not close the gap between BARC 6.7% and LLOY / RBS c.9.8% – However, iShares is unlikely to contribute more than 2% of group revenue – Yet a sale would represent 65% of market cap.
Of course, we should mention here that Barclays also released a short, but pretty positive trading statement on Monday morning. Like Bank of America, Citigroup and JP Morgan, it too has enjoyed a strong start to the year.
Shares in Barclays are currently up 9.9p at 84p.
Update:
Comment from Deutsche Bank (HT Bryce Elder).
Confirmation of talks over iShares sale
Barclays confirmed it “has held discussions with a number of potentially interested parties…
No decision regarding the disposal of any business has been taken by the board…”. Weekend press coverage (e.g. Financial Times) suggests sale at ~£3-£5bn, 83% of current market cap for ~8% of earnings.
iShares is a good business
iShares is an attractive part of Barclays Global Investors, accounting for 41% or £405m of divisional revenues in 1H08. Discontinued disclosures from 2007 showed iShares as the most profitable of the three BGI businesses generating a 15bps PBT / AuM margin compared with 2bps in Index and 12bps in Active. If iShares operated with a 61% cost/income ratio in 1H08 as in 2007, suggests annualised pre-tax and post-tax profits of £485m and £340m respectively, which implies disposal multiples of 9 – 15x.
Related Links:
Barclays warned on toxic asset dumping – FT.com
Barclays’ conundrum on government scheme – FT.com
Barclays’ monoline risk – FT Alphaville
Is Barclays on the brink of selling BGI? – FT Alphaville