Last updated: May 15, 2009 1:59 pm

Barclays shares surge on BGI sale hopes

Barclays is in talks about selling asset management arm Barclays Global Investors for about $10bn, with potential bidders including US money manager BlackRock, according to people familiar with the matter.

Talks on the potential sale of BGI are the outcome of an initial auction for iShares, the fast-growing exchange-traded funds unit of BGI, which Barclays agreed to sell to CVC Capital Partners, the private equity group, for $4.2bn last month.

Under a “go-shop” provision of that sale, Barclays can seek alternative bidders for iShares until June 18. The bank must pay a $175m break-up fee to CVC if it selects an alternative bid.

BlackRock manages $1,280bn. Buying BGI would give BlackRock a huge boost in exchange-traded funds, one of the hottest areas of asset management.

BC Partners and Hellman & Friedman, the private equity groups, are both considering a counter-bid for iShares.

Barclays confirmed on Friday that it had received “a number of expressions of interest, including unsolicited interest” in the broader BGI business, but cautioned that there was no certainty these would lead to any transaction beyond the iShares sale.

Some analysts value BGI at 12-to-15 times its forecast pre-tax profits of £450m ($685m) next year, more than half of which is expected to come from iShares. This would value the business at $8.2bn-$10.3bn.

Shares in Barclays rose as much as 9 per cent in early London trading on Friday, before giving up some of their gains to stand 16¼p or 6.4 per cent higher at 269¼p in afternoon trading. The shares have rebounded from a 58p low reached in March.

The bank, which has resisted being bailed out by the UK government, has signalled that it will bolster its capital levels by the sale of iShares.

It passed a “stress test” devised by the Financial Services Authority in March, which checked if it could withstand a severe recession. But it may see benefits in strengthening its balance sheet further.

The bank said its pro forma equity tier one capital ratio – a measure of financial strength – at the end of 2008 was 7.2 per cent, including the iShares deal.

Cazenove on Friday estimated that a sale of BGI would improve the bank’s tier one capital ratio by 50 basis points and result in a pre-tax accounting gain of £3.1bn after writing off goodwill of £1.5bn.

BGI operates in 15 countries and manages £1,047bn of assets. It offers funds focusing on active, index and asset-allocation strategies, and services including cash management. “iShares is the beating heart of BGI,” said one person familiar with the iShares auction. “So as long as they were selling iShares, it made sense to sell it all.” In addition, BGI’s management was against carving iShares out, the person added.

Another person involved in the auction said selling all of BGI would be sensitive as it would result in a big pay-out to the top management who own shares in the company. Bob Diamond, BGI chairman, is due to receive $6.9m from selling iShares.

Laurence Fink, BlackRock founder and chief executive, is one of the better placed Wall Street executives to raise capital.

By considering a sale of BGI, Barclays is likely to attract a wider universe of bidders, including possibly Vanguard, another early suitor for iShares.

Barclays and BlackRock declined to comment.

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