Earlier this week, The Royal Bank of Scotland Group (NYSE:RBS) received a £1.5 billion ($2.35 billion) bid for its on-sale 316 branch network from W&G Investments – a consortium of city funds and pension funds.  While this bid from W&G Investments which promises a pay-out of £1.1 billion ($1.7 billion) up front and up to an additional £400 million based on performance is the best one received by RBS for the branches. But it also complicates the situation given RBS’s race against time in the branch sale dubbed Project Rainbow.
RBS had inked a deal to sell these branches to Santander (NYSE:SAN) in August 2010, but the deal fell through after a good two years of review and due diligence when integration issues forced the latter to pull out. ((Statement on disposal of UK Branch-based Business, RBS Press Releases, Oct 15 2012)) Facing the European Commission’s (EC) deadline of 2013-end to finalize the branch sale, RBS has been racing to finalize a deal – shortlisting the consortia led by private-equity firms AnaCap and Corsair Capital as prospective buyers from a long list of suitors. But with W&G Investment bidding much higher than the £800 million to £1 billion ($1.3-$1.6 billion) currently being offered by the P-E consortia, RBS will be forced to consider the bid. This is bound to delay the sale process further.
We maintain a $11 price estimate for RBS’s stock, which is at a premium of about 10% to current market prices.
In return for its £45.5 billion bailout in the aftermath of the global economic downturn of 2008, the European Commission laid down a list of restrictions as well as compulsory divestments that RBS had to undertake. ((Darling hails Lloyds and RBS move, BBC News, Nov 3 2009)) The requirements included the disposal of the group’s Global Merchant Services (WorldPay) and RBS Sempra Commodities by the end of 2013, and a complete exit from the insurance business by the end of 2014.  The group’s branches - 311 RBS branches in England & Wales and five NatWest branches in Scotland - which focused on certain SME and corporate activities were also earmarked for sale. The restrictions imposed also forced the group to cut down on investment banking operations to stay out of the list of top five global debt originators with RBS being banned from restarting its non-core activities until the end of 2014. ((Statement on disposal of UK Branch-based Business, RBS Press Releases, Oct 15 2012))
RBS has stuck to the restrictions, sold out of its stake in WorldPay and RBS Sempra Commodities and also initiated the spin-off of the insurance business as the Direct Line Group through an IPO. It would have sold off the branches too if the deal with Santander had not been snagged by technology and separation-related complexities.  Quite notably, Santander offered £1.65 billion ($2.6 billion) for the branch network.
These branches serve nearly 1.7 million retail customers with deposits of around £20 billion ($31 billion) making it a sizable part of RBS’s business banking operations which reported $170 billion in outstanding loans at the end of 2012, as shown in the chart above. The deteriorating economic conditions in the region and the declining profitability of the business over the recent years reflects the fact that the two shortlisted bids for the business are about half of what Santander had offered more than two years ago – giving RBS an incentive to accept the latest bid by W&G Investments.Notes: