Royal Bank of Scotland caused a stir in the equity markets last month when it unveiled plans to purchase Ohio-based retail bank Charter One Financial in a cash deal worth $10.5 billion. This isn?t the first time the Edinburgh-based bank has shown a taste for M&A. Notably, its hostile takeover of UK rival NatWest in 2000 made it the fifth-largest bank in the world by market capitalization.
The acquisition will be made through RBS subsidiary Citizens Financial, and will make it one of the 10 largest commercial bank holding companies in the US. The date of the transaction isn?t set yet but it is expected to be completed in the fourth quarter this year.
On May 4 RBS launched a £2.5 billion ($4.5 billion) equity placing to part finance this 100% cash offer, which was made at $44.20 a share. With about £3 billion a year of excess capital, RBS was in a strong position to finance such a deal and additional funds are expected to be raised through preference shares and internal resources.
The sale was originally meant to be launched through a two-day bookbuild starting on May 4 but it was closed on May 5 because of strong demand. The placing was the second-largest accelerated offering ever in the UK behind Vodafone?s £3.5 billion placing in May 2001, pushing RBS?s own £2.1 billion issue in July 2001, to fund the purchase of US financial group Mellon, to third place.
It was crucial that RBS raised the capital as quickly as possible to secure the deal. ?The placing was used as it was the simplest method to raise capital,? says Jim Renwick, head of European equity capital markets at UBS. Some 5.3% of the existing share capital was issued which meant that it did not have to be offered to shareholders first.
An accelerated share offering can also be completed within a day whereas a pre-emptive issue can take up to three weeks. ?Furthermore, Royal Bank of Scotland needed 100% equity credit, so any structure that involved convertibles would not have secured a full equity credit,? adds Renwick.
The sale went smoothly considering the difficult markets during the first week of May. Demand was 1.5 times covered and the issue was priced at a 5.9% discount to the closing price on May 4 and 0.3% to that on May 5.
Strong demand from existing shareholders and US investors was also crucial. A broad base of big investors was attracted, resulting in 60% of the new shares being allocated to UK-based accounts and 15% and 14% to US and European investors respectively.
RBS?s shares were trading at around £17 before the placing and fell to £16.25 when the offering was launched. On May 6, the share price rallied 1% to £16.419 and at press time it was £16.68.
RBS already has a presence in the US through Citizens Financial?s networks across New England and the mid-Atlantic states. Charter One Financial will extend coverage to the northeastern and midwestern states. The two franchises overlap but only minimally.
Some market observers reckoned the $44.50 cash per share offer was too expensive. The agreed price was 15.1 times the market consensus forecast for Charter One?s after-tax earnings in 2004 and 13.9 times the consensus earnings forecast for 2005. But RBS believes there will be big financial benefits, increasing by 25% the proportion of its pre-tax profits coming from the US.
But in RBS?s forecast for business growth and transaction benefits, the acquisition of Charter One will meet the Scottish bank?s 12% post-tax hurdle rate and will have a broadly neutral impact on group earnings per share in 2005 and will be accretive thereafter.
A spokesperson for RBS said the deal was comfortably oversubscribed, declining to comment further. In a press statement, Fred Goodwin, RBS Group CEO, said: ?This is a highly logical and very natural acquisition for Citizens to make. As well as making good financial sense in its own right, it opens up another interesting range of options for Citizens to maintain their strong growth momentum, and it consolidates Citizens? position as one of the leading banks in the US.?
With the weak dollar making regional banks in the US attractive, this purchase may be the first of a run of cross-border deals between US and European banks. Other European players with an interest in making US retail acquisitions include HSBC, Barclays, ABN Amro and BNP Paribas.