Barclays' shares fall on imminent fundraising deal

Barclays PLC's shares fell 7.5 percent on Wednesday on the growing likelihood that a 7 billion pound ($10.6 billion) fundraising deal, expected to erode shareholder value, will be approved.

Barclays, Britain's second largest bank, said earlier Wednesday that institutional investors had agreed to buy all 500 million pounds ($750 million) worth of preferred stock offered to them on Tuesday. The stock was previously part of a larger offering earmarked for a trio of private investors in the Middle East, but was opened up to existing shareholders after complaints poured in.

The successful sale suggests leading shareholders will vote in favor of the wider plan, worth 7 billion pounds, at a meeting next week.

Prior to Barclays offering the shares to institutional investors, there had been growing speculation that stockholders would reject the deal as two key shareholder advisory groups suggested the deal had no advantage over a government bailout accepted by three of Barclays' rivals.

"With the large institutional shareholders now involved, it's more than likely that this will be voted through," said Richard Hunter, head of British equities at Hargreaves Lansdown Stockbrokers.

Under the plan, 2.5 billion pounds ($3.8 billion) worth of high interest rate preference shares are to be sold to the Qatar Investment Authority, the Challenger investment vehicle led by the Qatari royal family and Sheik Mansour Bin Zayed Al Nahyan of the Abu Dhabi royal family.

That sum was 3.0 billion pounds before protests caused Barclays to carve out a 500 million portion for existing shareholders.

The overall investment from the Middle East is for 5.3 billion pounds ($8.1 billion).

With major shareholders eagerly buying into the share issue, this investment plan is now more likely to be approved.

This eroded the bank's stock price on Wednesday on views the deal will be expensive for the bank because of the high interest rate it will pay on almost half of the new shares.

The stock taken up by institutional investors pays 14 percent annual interest for ten years.

The deal is also negative for existing shareholders as it will also give the Mideast trio the chance to buy an additional 2.8 billion pounds ($4.2 billion) of common shares at a discount.

Barclays was the worst performing bank in Britain's leading FTSE 100 stock index on Wednesday. Its shares closed down 13.3 percent at 129.6 pence ($1.96).

Barclays management agreed to take investments from the Middle East last month rather than participate in the government's recapitalization plan, which was taken up by Royal Bank of Scotland Group PLC, Lloyds TSB Group PLC and HBOS PLC.

That deal would have required Barclays to cede a stake to the government, but the government was asking for a lower 12 percent annual interest on shares in return, and the government also would have allowed the bank to buy those shares back at any time as opposed to locking in a high interest rate for ten years.

"The bank is paying quite an expensive premium to retain its independence from the government," said Hunter.

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