Royal Bank of Scotland should list the branches it must shed, not sell them. The British bank is likely to decide shortly between three bids for the assets that the European Commission wants it to offload, after a failed attempt last year to sell them to Santander. The best choice would be one that allows R.B.S. to share in any upside.
The three bids on the table help R.B.S. achieve different things. An institutional investor-backed bid by W&G Investments is offering to pay 1.1 billion pounds upfront, and allows the bank to retain 400 million pounds of the profit it would make in the two years it will probably take for the branches to be hived off. If Brussels forces R.B.S. to sell all 315 branches by the end of this year, W&G would provide a quick exit near book value. It would also remove uncertainty ahead of the planned sale of the 81-percent government stake in the bank.
The other bids, one fronted by AnaCap and the Blackstone Group and the other by Corsair Capital and Centerbridge Partners, would see the buyers provide 600 million to 800 million pounds as cornerstone investors in a future listing. The buyers’ ultimate stake would depend on the actual initial public offering price. That would be a good option â€" if R.B.S. can persuade Brussels to allow more time for the sale. That is likely: the European Commission is sympathetic about R.B.S.’ predicament, according to a person familiar with the situation.
Freed from the deadline, R.B.S. should eventually be able to fetch a better price than 1.5 billion pounds. True, the current offers reflect the need for information-technology investment from the standalone branches. Furthermore, small business banking may face a British competition commission inquiry in the near future. Still, the 305 million pounds of operating profit the assets made in 2012 imply the branches’ return on equity is above their 11 percent cost of equity. That suggests a valuation above book value.
The downside with the offers is that the money pumped in as down payment could be in the form of a bond, with interest paid by R.B.S. to the buyers until the branches are finally separated. Of course, if the bank is feeling confident, it could, like its peer, Lloyds Banking Group, ignore all three bids and press forward with an I.P.O. by itself.
George Hay is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
