RBS Finally Closes Project Rainbow Deal

The Royal Bank of Scotland Group (NYSE:RBS) finally released a detailed plan for the sale of its branch network (dubbed Project Rainbow) late last week with the U.K.-based banking group accepting a £600 million ($970 million) investment from a group of investors led by Corsair Capital, to recapitalize the 314-branch network as a separate business. ^[1] The business will use the long-dormant Williams & Glyn’s brand and will go public in late 2015.

Although RBS will overshoot the end-2013 deadline set by the European Commission (EC) for this divestiture by a good two years, its request for an extension will most likely be accepted given the earnest efforts the bank has put since 2010 to get rid of the branches. With this deal finalized, RBS has either completely exited or has a plan in place for its subsequent exit from each of the business units mandated by the EC at the time of its bailout in 2009.

We maintain a $11 price estimate for RBS’s stock, which is at a premium of about 10% to current market prices.

See our full analysis for RBS’s stock

In return for its £45.5 billion bailout in the aftermath of the global economic downturn of 2008, the EC laid down a list of restrictions as well as compulsory divestments that RBS had to undertake over following years. ^[2] 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 – 308 RBS branches in England & Wales and 6 NatWest branches in Scotland – which focused on certain SME and corporate activities were also earmarked for sale under Project Rainbow. 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 its stake in WorldPay and RBS Sempra Commodities, and also reduced its stake in its erstwhile insurance business to under 30% after spinning it off as the Direct Line Group (see RBS’s Stake In Direct Line Drops Below 30% Raising $1 Billion In The Process). But Project Rainbow proved to be jinxed, with Santander backing off in late 2012 – a good two years after announcing its decision to acquire the branches – due to technology and separation-related complexities. ^[3] With not much times on its hands, RBS started from scratch and vetted the proposals its received for almost a year before finally zeroing-in on the one by the investors Corsair Capital, Centerbridge Partners, the Church Commissioners for England and RIT Capital Partners.

The investors will put in £600 million ($970 million) of cash into the branches now and could invest an additional £200 million ($320 million) based on the performance of the newly created Williams and Glyn’s business. Quite notably, RBS will itself be financing the deal to a great extent, with its Markets segment lending £270 million ($440 million) to the consortium as a commercial loan – which means the investors put in only £330 million ($530 million) of their own cash.

At the end of Q2 2013, the Williams & Glyn’s business managed £22.2 billion ($36 billion) in customer deposits and recorded a net income of £168 million ($270 million) for the first half of the year. The spin off will, hence, result in a small decline in RBS’s bottom line going forward. The impact on overall share value can be understood by making changes to the chart above.

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1. Return of Williams & Glyn’s moves closer, RBS Press Releases, Sept 27 2013 [↩]
2. Darling hails Lloyds and RBS move, BBC News, Nov 3 2009 [↩]
3. Statement on disposal of UK Branch-based Business, RBS Press Releases, Oct 15 2012 [↩]