Going Private Again: A Decade Long Roadmap From RBS

This has been a particularly eventful year for The Royal Bank of Scotland Group (NYSE:RBS). The global banking group had to abandon plans of beginning its re-privatization early this year, after performance was hit by continued sluggishness in the European economy – only to have the British government mull the possibility of a complete nationalization of the bank. ^{[1] [2]}

By the end of the year, RBS had thwarted nationalization attempts by demonstrating improvements in its results, and had also etched out a reasonable strategy towards eliminating the British government’s 82% stake in it, over a 10-year period. ^[3] And as the banking group continues to work its way through the obligations it committed to the to the European Commission (EC) at the time of its bailout in 2008, its share price is trading at above $10 apiece for the first time since July 2011.

We are in the process of updating our $9.50 price estimate for RBS’s stock to factor in the impact of its proposed privatization plan over the coming years.

See our full analysis for RBS’s stock

The Next Two Years Would Be Dedicated To Clearing EC Commitments

In return for its £45.5 billion bailout at the peak of the global economic downturn of 2008, the EC laid down a list of restrictions as well as compulsory divestments that RBS had to undertake. ^[4] The requirement included the disposal of the group’s Global Merchant Services (WorldPay) and RBS Sempra Commodities by the end of 2013 and complete exit from the insurance business by the end of 2014. Some RBS branches in the U.K. were also earmarked to be sold. As a part of the restrictions, the group cannot restart its non-core activities till the end of 2014, and cut down on investment banking operations enough to stay out of the list of top 5 global debt originators. ((Statement on disposal of UK Branch-based Business, RBS Press Releases, Oct 15 2012))

RBS has stuck to the restrictions, sold out its stake in WorldPay and RBS Sempra Commodities, and is expected to ink a deal to sell-off the required branches early next year (see Two Failed RBS Divestitures Now Face Different Fates). It also reduced its stake in the insurance business by listing it as the Direct Line Group early this year (see RBS Sells 30% Direct Line Stake In Successful IPO). The chart above shows our forecast for RBS’s average stake in Direct Line over the coming years. Do note that it represents the average stake, which explains the 91% figure for this year (100% stake until Q3 2012, and 65.3% stake over Q4 2012).

And Then Will Follow The Privatization Process

Till the end of 2014, RBS will focus on cutting down on its businesses and shoring up its capital, after which investors can expect dividends from the banking group for the first time since 2008. Once dividends are back in place, the 82% stake the government currently owns, is expected to be sold over the next eight years through four offerings – with each offering representing a quarter of the £45.5 billion the British government pumped into the banking group.

The chart above shows our forecast of RBS’s dividend payout over the coming years. To see how a change in the actual dividend paid affects the bank’s overall value, you can make changes to the chart above.

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1. RBS raises hopes of privatisation, Financial Times, Jan 30 2011 [↩]
2. Cabinet discusses full nationalisation of RBS, Aug 1 2012 [↩]
3. RBS unveils ten-year plan to move away from State’s grip, The Times, Dec 3 2012 [↩]
4. Darling hails Lloyds and RBS move, BBC News, Nov 3 2009 [↩]