Is Barclays Selling Off iShares Really A Good Idea?

Barclays are once again putting up a good fight against the tentacles of part-nationalisation. Previously we saw how they used the diplomatic dream team of Amanda Staveley, and Roger and Dijana Jenkins to avoid a government bailout by tapping Middle Eastern sovereign wealth funds. Unfortunately for them, Barclays is still getting dragged down by the ever-thickening mire of bad assets, and has been looking like the next candidate for the government’s asset-insurance program after Lloyds/HBOS signed up last week.

Their new wheeze to avoid this is to flog their exchange-traded funds (ETFs) business in order to get the buffer of capital it needs - ETFs are investment vehicles that behave like stocks, tracking the course of a stock market index, like the Dow Jones, but which don’t actually trade in the stocks held on it.

Their ETF business is called iShares – yes, even fund managers can’t help but stick “i” in front in things to make themselves sound personable and funky in a noughties kinda way. The sale could net up to £5bn, the same amount that the government is expected to charge them for the insurance scheme. Investors must think that Barclays are going to stay independent of the government because of this sale, because Barclays shares jumped after the news broke yesterday.

But there are few reasons why selling off iShares might not be a great idea in the long run for Barclays. Firstly, it’s a growing business that is trading in a still-popular investment strategy – Barclays would miss out on all that future revenue. Secondly, it’s looking like they may not get the price they want for it – amid the recession, large banks have the cash to buy it but are reluctant to use it, while other ETF managers simply don’t have enough money in the first place. The price could get driven down below the amount of capital Barclays need. And while there is potential for growth, right now it’s not happening – ETF assets fell $83bn in the first two months of the year. To sell amid such a slump would get Barclays a bad price for a potentially good company.

There are some, however, who are questioning the ongoing value of ETFs, and of iShares – a source who spoke to IFA Online said iShares had an “unsustainably strong reputation” and that “the perception of growth in this business” was greater than it actually will be. So maybe it’s actually a good time to sell, with ETFs potentially losing profitability over a longer term than expected.

But why sell it at all? Why not just sign up to the insurance program to restore their capital ratio to the 14.5% now being enjoyed by Lloyds? FT’s Alphaville puts in succinctly: “State-interference must be avoided at all costs since that would cost Barclays its lucrative tax avoidance business and also cost Messrs John Varley [chief exec] and Bob Diamond [president] their jobs.” While Gordon Brown wouldn’t necessarily get rid of Varley and Diamond – he explicitly preserved Lloyds’ chief Eric Daniels last week in the name of stability – the clever tax avoidance would certainly come to an abrupt end. Barclays is said to avoid £1bn in tax a year through Jenkins’ loophole dancing – if the government part-owned the bank they could kiss that revenue goodbye. And there’s also the little matter of Diamond and other employees losing their ongoing income from iShares stock options – Diamond made £7.76m from them in 2006 alone, though then again, if they believe that iShares could tank, maybe they stand to make more from selling on their stock to a buyer.

Sources the FT spoke to said that the sale of iShares didn’t have anything to do with trying to avoid the asset-insurance program, but we’re not sure whether to believe that. Would they really be able to get away with another rights issue, effectively handing over yet more equity to the Middle East? The Mail is claiming today that Roger Jenkins has gone back to his sheikh chums to get more capital, as well as to buy iShares and pass it on to a consortium of US-based ETF managers. A source told the FT over the weekend that Jenkins was putting something together as well. Watch this space to see exactly how this deal pans out.

Posted by Ben Beaumont-Thomas in Hot Money | March 17, 2009 12:11PM |