Barclays Activist Sherborne Puts Cap on Potential Stock Gains, Losses with Loan -- Update

By Margot Patrick 

LONDON -- Sherborne Investors, the activist firm pushing Barclays PLC to shrink its investment bank, is financing around half of its multibillion-dollar stake in the British bank with a loan from Bank of America Corp.

Sherborne, headed by Edward Bramson, wants Barclays to focus on consumer banking and has asked Barclays' shareholders to appoint Mr. Bramson to the bank's board at a meeting in May. Last week, Barclays' board recommended a vote against Mr. Bramson's appointment, saying it remains confident in the lender's current strategy combining investment banking, credit cards and U.K. retail banking.

The fact that Sherbourne has financed some of its stake, and limited both its upside and downside on the bet, could color attempts to get other investors to support the campaign. Analysts say Mr. Bramson faces a huge challenge to get on the board because his message hasn't gained traction, and some Barclays shareholders have already said they would vote against him.

"It would be highly unusual for someone with such a small shareholding to be elected to the board of a company. But even if he knows he's going to get voted down, achieving some degree of support from the shareholder base will give him more currency in terms of his argument," said John Cronin, a bank analyst at Goodbody Stockbrokers.

Sherborne, in a Feb. 8 filing, said it bought part of its stake with a $1.38 billion loan and put and call options from the lender to cap its exposure. These protect against losses if the shares fall below a particular level and limit potential gains. The options expire between October and March 2021. People familiar with the matter said Bank of America is the lender and counterparty on the options. The securities filing and the Bank of America loan were earlier reported by the Financial Times.

In the U.S. securities filing, which was made because Sherborne's stake in the bank has risen above 5% to 5.5%, Sherborne said it bought Barclays shares because it believes they are undervalued. It said it would continue to discuss Barclays' performance, capital structure, financial condition and strategic direction with the bank's board and management, and could make further proposals to the board's composition beyond the effort to elect Mr. Bramson.

Sherborne in March 2018 first disclosed it held a 5.2% stake in Barclays through shares and derivatives. Sherborne's Mr. Bramson and Stephen Welker met last year with Barclays officials, including Chief Executive Jes Staley and Chairman John McFarlane, to discuss potential changes at the bank, but they haven't been able to find common ground in their visions for the bank.

Mr. Staley and his management team, with the board's support, want to improve returns at Barclays investment bank by expanding in some areas, and consider it core to its strategy to have diverse operations. Mr. Bramson in a December letter told investors in a Sherborne fund that he believes the unit will keep dragging down the bank's valuation without an overhaul.

Last week, Barclays countered Mr. Bramson's view by reporting a better-than-expected performance by the unit in the fourth quarter. Barclays and Sherborne are scheduled to meet again on March 12, Mr. Staley said, while announcing last week's results. He said he doesn't see the need for Mr. Bramson to join the board to share his views.

Sherborne's loan from Bank of America is part of a financing structure known as a funded equity collar. The structure involves a bank making a loan to an investor to buy shares, with the shares as collateral, and entering put and call options on the stock to cap the investor's upside and downside.

In its filing, Sherborne said it purchased 943,949,089 shares in Barclays for around $2.54 billion in all, with a bit less than half paid for in cash from its funds and the rest through derivative transactions.

Sherborne is aiming to make at least double its investment in the bank by bringing about changes, according to people familiar with the matter.

Write to Margot Patrick at [e-mail]

(END) Dow Jones Newswires

February 28, 2019 14:04 ET (19:04 GMT)

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