On Sep 17, the UK government announced the sale of a 6% stake in Lloyds Banking Group plc (LYG - Snapshot Report) – UK’s biggest retail bank. Of the total holdings of 27.6 billion shares, 4.3 billion shares will be shed at a price of 75 pence per share, resulting in total proceeds of £3.21 billion ($5.1 billion) for the UK Treasury. Following this announcement, the bank's share price declined more than 2% on the London Stock Exchange.
The selling price represents a 3% discount to Monday’s closing price of 77.36 pence but exceeds the price of 73.6 pence per share paid by the government while buying the stake. Therefore, the transaction is expected to result in a profit of £60 million ($96 million) for the taxpayers.
The reprivatisation of Lloyds by the government is symbolic of the banks coming back to profitability and the improving economic conditions in UK post the recent financial crisis.
The share price of Lloyds has increased 93% over the last 12 months riding on optimism over its restructuring efforts including the shedding of non-core assets and focus on lending to British customers. Moreover, the bank reported in August that it had returned to profit. Lloyds posted £2.1 billion ($3.2 billion) profit for the six months Jun 30, 2013, compared with a loss of £456 million in the prior-year period.
When the banks tumbled during the crisis, the UK government bailed out financial institutions with more than £100 billion. Notably, £20.5 billion was paid as bailout money to Lloyds and around £45.5 billion to Royal Bank of Scotland Group PLC (RBS - Snapshot Report). Currently, the taxpayers still hold 81% stake in RBS.
UK Financial Investments Ltd – the British agency that administers the government's stake in the banks it helped bail out, will place the shares for sale on Sep 20. After the completion of the transaction, the UK Treasury would be left with 32.7% stake in Lloyds. Most of the shares were vended to the UK and U.S. funds along with some sovereign-wealth funds.
Notably, the Treasury aims not to sell any more shares for the upcoming 90 days. Moreover, the second sale, which is expected in the first half of 2014, might involve retail investors.
BofA Merrill Lynch, a unit of Bank of America Corp. (BAC - Analyst Report), J.P. Morgan Cazenove, part of JPMorgan Chase & Co. (JPM - Analyst Report) and UBS Investment Bank, a unit of UBS AG (UBS - Analyst Report) acted as the joint bookrunners for the Placing.
The UK Treasury conducted the sale process to return taxpayers’ money, maximize support for the economy and reinstate the banks to private ownership. The reduction of the Treasury’s stake in Lloyds proves that the bank has come a long way since 2008, when it had to opt for a bailout to survive the economic downturn. Over the past few years, the company has been restructuring its business to make it profitable.
We believe that with the exit of the Treasury’s stake, Lloyds will be able to concentrate more on developing its core operations and boosting revenues in the upcoming quarters. Investors can consider Lloyds to be a sound investment option, given its attractive core business.