RBS May Not Meet Sell-Off Deadline

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The share price of the Royal Bank of Scotland (LSE:RBS) had dropped from 343.6 to 339.3 as of 13:20 today.  The consensus on the street is that the decline has come as the result of an statement by W&G Investments (LSE:WGI).

The statement was in reference to the government-mandated divestiture of 315 under-performing RBS branches.   W&G said, “It is possible that separation will not be acheived within the two-year period currently contemplated.”     W&G Investments is a recently formed, London-based consortium created expressly for the purpose of making a winning bid to take over the RBS branches.  I  have included W&G’s EPIC code although W&G’s stock has not yet been floated.  It’s IPO is expected tomorrow, during which the company hopes to raise £15 million.

The group is led by Andy Higginson, former Tesco (LSE:TSCO) CFO and includes Schroders (LSE:SDR), Threadneedle, Lansdown Partners (LSE:LAND), Talisman, Aviva Investors (LSE:AV.), Franklin, Toscafund, Old Mutual Global, Jupiter, and Invesco.

Originally Banco Santander (LSE:BNC) had offered to purchase the failing branches for £1.65 billion.  On 15 October 2012 Santander backed out of the deal that had originally be scheduled to close in 2011.  On 28 June 2013 we reported that the Church of England was putting a consortium together to buy the troubled arm of the bank led by John Maltby, formerly associated with Lloyds Banking Group.  An offer from a group led by Alan Hughes, formerly with HSBC (LSE:SBA), is also in the works.

At least the “Good Bank – Bad Bank” scheme proposed by former RBS CEO Stephen Hester, seems to have followed him out the door.  In that proposal, RBS would privatise as the “Good Bank” and UK taxpayers would continue to hold the “Bad Bank” for which they have already paid £45.5 billion in 2008.  I saw that as Mr. Hester saying to the British people, “Thank you for the £45.5 billion.  To show you our gratitude, we are going to privatise the good stuff and let you keep the part that we still can’t make profitable.”   How’s that for a deal?

The puzzlement is why anyone would want to buy these RBS leftovers.  The greater puzzlement is why W&G would want to pay £1.1 billion in cash.  Apparently, W&G believes that its cash offer will put it in the position of preferred bidder, which cash offers usually do.  Actually, the offers are not all that puzzling, as long as we think in terms of today as opposed to yesterday.

The economy is still in bad shape, but their are continuing signs that it is recovering, perhaps not as fast as everyone would like, but recovering nonetheless.  It’s a little easier to buy a broken business when the sun is rising on the horizon than in the dead of a moonless night when what you have bought in the dark of night fails to shine in the light of day.

The fly in the ointment at this point is that RBS is probably going to have to ask the government for an extension for the 2014  sale deadline because deals like this, cash upfront or otherwise, are not penny-candy transactions.  W&G has projected that final details of the exchange may not be completed until well into 2016.  That would be true for any successful bidder.

So, the tension mounts as we approach next month when the preferred bidder will be revealed.

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