United Kingdom high street bank Barclays surprised the City of London last week by announcing an audacious tie-up with the Chinese government to boost its bid for ABN Amro. Barclays tabled a â,¬67,5billion improved cash-and-shares offer for the Dutch bank after it won a pledge from the state-run China Development Bank (CDB) to inject â,¬10,4billion into the merger, should it go ahead.
Barclays chief executive John Varley said the investment, the largest by a Chinese bank in a foreign company, was a vote of confidence in the bank and its planned takeover of ABN.
The Singaporean government’s investment arm, Temasek, would combine with CDB to raise the overall cash injection from Asia to â,¬13,4billion after a takeover and â,¬3,6billion even if the deal falls through.
The cash allows Barclays to jettison its all-share offer for ABN in favour of one with 37% in cash. But analysts said it still faced an uphill struggle to beat the £48billion bid by a consortium led by Royal Bank of Scotland (RBS).
Barclays executives trumpeted the deal as an opportunity for the bank to extend its foothold in China. Bob Diamond, the head of the bank’s highly successful international investment arm, Barclays Capital, said the bank would partner CDB as it expanded in Africa and South America; the growing influence of China on these continents would give a combined Barclays and ABN huge potential for growth.
Barclays revealed that talks with CDB began in May, the time of its initial bid for ABN. Diamond is understood to have been the driving force, using contacts in the Chinese banking community and Blackstone, the private equity firm that brokered the investment for CDB.
Soaring profits at Barclays, revealed in a trading statement, showed Diamond’s pivotal role. Profit for the first six months of the year rose 12% to £4,1billion on income up 9% to £12billion, much of it supplied by investment business.
The ABN board initially recommended the Barclays offer, but has come under intense pressure in the past week to switch its allegiance to the RBS-led consortium.
Analysts said RBS and its partners, Fortis and Santander, were in a winning position; their offer is 93% cash. The revised RBS offer followed a court ruling allowing the sale of ABN’s coveted United States division, LaSalle, to Bank of America.
Colin Morton, an analyst at Rensburg Fund Management, which holds both Barclays and RBS shares, said: ”Royal Bank of Scotland is still the favourite, but the odds are a little bit different to what they were. You would think people would take the cash and run, unless Barclays can convince people how much benefit they can get out of it if they stick around.”
Varley said it would take time for the implications of the deal to sink in with ABN’s shareholders. He expected them to appreciate the potential for growth and for the share price to appreciate over the next weeks and months. Any rise in the Barclays share price would increase the value of its bid.
”The [ABN] board will want to see what the impact of the story we are telling is on our stock price,” he said. ”Do I think ABN will recommend our offer? Yes.” When asked if he was planning to increase the offer again to trounce the RBS bid, Varley said: ”We’ve put this enticing cream cake on the table for ABN shareholders. We are not going to top it up with more cream.”
Barclays repeated that it would proceed with its offer only with the ABN board’s backing. ABN said it ”welcomed the opportunity for shareholders to consider two competing proposals on a level playing field.”
The Dutch bank said it would consider both proposals ”in a fair and transparent manner”, but praised the growth opportunities presented by the tie-up with the CDB. ”The proposed strategic cooperation further enhances the growth opportunities of the combined group in the attractive Asian market and could result in the creation of additional long-term value for ABN Amro shareholders.” — Â