Barclays Quits BlackRock

NEW YORK ( TheStreet) -- Barclays ( BCS) said Monday that it will to sell its $6.1 billion stake in BlackRock ( BLK) in an effort to meet new regulatory measures.

The second largest bank in Britain took a 19.6% stake in Blackrock, one of the world's largest asset managers, when it sold its ETF and investment fund unit called Barclays Global Investors to BlackRock for about $15.2 billion in 2009.

Barclays sale of BGI was an effort to raise private capital during the financial crisis, as peer institutions like Royal Bank of Scotland ( RBS) were partially nationalized by the British government. In contrast, because Barclays stake in BlackRock will no longer count as capital when new Basel capital rules are enacted, Monday's sale is an effort to meet new standards, as banks around the world follow suit.

Barclays said that it will dispose of its BlackRock stake in a share offering that it filed with the Securities and Exchange Commission. In the offering, BlackRock will buy up to $1 billion of its stock were the sale to be completed, Barclays said in a statement.

In September 2011 Barclays wrote down its investment in BlackRock to a fair value of £3.4 billion ($5.3 billion) and has subsequently accounted for increases in its equity as BlackRock shares gained. The volatility in the value of its share investment nevertheless signals the reasoning behind Monday sale. The newest set of the Basel rules will force the Barclays to put capital behind equity stakes such as its BlackRock investment, to absorb any decline in value. Since Barclays took the near 20% stake, BlackRock has slipped 24%, Bloomberg calculates.

Equity holdings will also be discounted as capital on a bank's balance sheet, making share stakes a potentially costly investment. In the U.S. the Dodd Frank Act seeks to curb many of the proprietary and private equity investments that were commonplace among the largest U.S. banks, in an effort to mitigate against the volatility in bank asset and equity values.

For BlackRock investors, the large sale of its stock may be a short-term negative, but a long term benefit. " We expect the stock to be a bit weak on the news, but longer term, it should be an incremental positive, as it removes the overhang and gives BLK more flexibility for future buybacks (given the increased float)," writes Deutsche Bank analyst Michael Carrier in a Monday note to clients. Still, Carrier notes that the timing of the share sale may not be optimal given limited investor interest in asset managers.

The market value of Barclays investment in BlackRock is $6.1 billion based on the closing price of BlackRock common stock on May 18 of $171.91. In pre-market trading on Monday, BlackRock shares fell over 2% to $168, while Barclays gained nearly 2% to $11.37.

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The sale by Barclays reflects similar moves by U.S. banks to bolster capital and transform balance sheets in the face of new regulations. Recently, Goldman Sachs ( GS), Bank of America ( BAC) and Citigroup ( C) have all sold large minority equity positions in foreign banks such as India's Housing Development Finance Corp, and Industrial & Commercial Bank of China and China Construction Bank, respectively.

In the share offering slated for May 23, Barclays, Morgan Stanley ( MS) and Bank of America expect to sell 29 million, including the over-allotment option, in what will be one of the biggest share offerings of 2012. On Friday, Facebook ( FB) sold just over $16 billion in shares, in the third largest U.S. IPO in history.

Barclays Chief Executive Officer Robert Diamond will step down from BlackRock's board following the sale, the company said in a press release.

For more on bank M&A, see 4 eurocrisis targets in U.S. banks crosshairs.

-- Written by Antoine Gara in New York