Barclays' Brookfield schmuck insurance may flop
LONDON, April 17 (Reuters Breakingviews) - Barclays (BARC.L), opens new tab has constructed an elaborate schmuck-insurance policy as part of its plan to possibly hive off its payments business. On Thursday, the 40-billion-pound UK bank announced, opens new tab a deal that could give Brookfield Asset Management (BAM.TO), opens new tab 10% of the division in return for the private-capital group's help in growing the unit, as well as the chance to buy 70% more at a yet-to-be-decided valuation in three to seven years. It looks like an overcomplicated way of avoiding seller's remorse, which may backfire in the end.
The lender's CEO C.S. Venkatakrishnan, known as Venkat, has been cooking up a sale since at least 2023 and had struggled to attract interest at a hoped-for 2 billion pound valuation, Reuters reported. The idea makes sense in theory. Payments groups often trade at a double-digit multiple of EBITDA - unlike banks, which in Barclays' case trades at a discount to book value. So offloading merchant acquiring units, which accept transactions on behalf of businesses, has been a popular way to unlock hidden value for European lenders.
The risk however, as Royal Bank of Scotland discovered after selling WorldPay to buyout groups after the financial crisis, is that the new private-equity owners can make a ton of money in short order, prompting angry questions from the seller's shareholders. In Venkat's case, that's a particularly acute risk since his unit's annual revenue fell by roughly a quarter between 2022 and 2024 to 271 million pounds. Barclays therefore risked selling at the bottom.
Venkat's answer is to try and have the best of both worlds. He's bringing in Brookfield to help boost the division with the help of Ron Kalifa, the sector guru and former CEO of WorldPay. Barclays will contribute 400 million pounds, and Brookfield will contribute ideas and expertise. In return for its efforts, the buyout group gets a 10% equity stake after three years and can buy another 70% in three to seven years. Barclays will retain the remaining 20%.
For Brookfield, the deal looks something like an option on future M&A, though it would presumably have preferred to buy the business now at a knockdown price. Barclays gets to retain the option of selling at a much higher valuation in several years if the Brookfield-assisted turnaround plan works.
It's possible, though, that Venkat's shareholders will still regret the elaborate move. Brookfield has no obvious incentive, aside from the tiny 10% stake, to ramp up the valuation of the business before buying it. The optimal plan, from the private-capital group's perspective, may be to watch things burn for a few years and then step in on the cheap, keeping the future upside for itself. In that scenario, Venkat would have tied up time and scarce capital in a doomed turnaround. Barclays might then regret not pursuing a quick and dirty sale to begin with.
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CONTEXT NEWS
Barclays on April 17 agreed a deal with Brookfield Asset Management that could see the private-capital group buy most of the bank's British payments business over several years.
The two parties will create a standalone entity for the business, into which Barclays plans to invest approximately 400 million pounds.
Brookfield may get 10% of the company in return for its help running the unit, and may within three to seven years acquire an additional 70% stake, leaving Barclays with the remaining 20%.
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