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The Royal Bank of Scotland Group plc (RBS - Snapshot Report) is in negotiation with private equity firms Corsair Capital and Centerbridge regarding the sale of its branches, under Project Rainbow. Corsair Capital and Centerbridge plan to offer roughly £600–£800 million, which would result in an equity stake until a stock flotation occurs in the future.
U.S.-based Corsair Capital has teamed up with Centerbridge as well as other investors including the Church of England's investment fund and Standard Life Investments in bidding for these branches.
Royal Bank of Scotland is yet to tide over its troubles and remains 81% owned by the U.K. taxpayers. Further, private ownership looks unlikely in the near future. The bank has been ordered by the European Union to sell as many as 315 branches to comply with state-aid regulations.
The branches on sale are Natwest branches in Scotland and the parent company’s branches in England and Wales. These have roughly £21.5 billion in consumer deposits and serve small businesses and consumers.
Rise and Fall of Royal Bank of Scotland
Once the shining example of Britain’s banking system, Royal Bank of Scotland has established that market dominance is transient. The banking major – which started out as a regional bank in Edinburg – became Scotland’s own economic miracle, with nearly 26 acquisitions in 7 years (up to 2007).
However, when the banking crisis erupted, it became obvious that many of the assets against which Royal Bank of Scotland had borrowed money were worth only a portion of its previous value. In 2008, the British government was forced to rescue the bank with the biggest bailout in history worth nearly £45 billion ($70 billion). However, 5 years down the line, the British government is still struggling to recover that amount and put the past behind.
Other Bidding Companies
In Oct 2012, Project Rainbow suffered a setback when Banco Santander, S.A. (SAN - Snapshot Report) stepped out of an agreement to purchase the branches.
Apart from Corsair Capital and Centerbridge, other final round bidders included W&G Investments Plc, the investment vehicle headed by Tesco PLC’s (TSCDY) former director of finance, Andrew Higginson. Another bid was also made by AnaCap Financial Partners, in collaboration with U.S. private equity giant The Blackstone Group L.P. (BX - Analyst Report).
Initially, the British government was commended for undertaking the bailout of banks during the financial crisis in 2007. However, the long process of restructuring banks is hurting the still-weak British economy. Further, the government's decision in 2008 to take a passive approach to manage its stakes in the deeply troubled banks has added to the country’s woes.
However, after years of a muted approach, the Treasury is adopting a proactive strategy toward The Royal Bank of Scotland. The British administration has demanded that the bank reduce its investment bank, shrink its U.S. unit and refocus on the U.K. business.
In compliance with the orders, Royal Bank of Scotland sold out of its stake in Global Merchant Services (WorldPay) and RBS Sempra Commodities. It has also initiated the spin-off of the insurance business as the Direct Line Group through an initial public offering (IPO). It would have divested some branches as well had the deal with Banco Santander not faced delays in closure due to technology integration problems.
However, we are encouraged by Royal Bank of Scotland’s efforts to restructure its business. With the divestment of its non-profitable units, we believe that the bank will be able to reinstate its former glory.
Royal Bank of Scotland currently carries a Zacks Rank #4 (Sell).