Shareholders in the Royal Bank of Scotland ought to consider various options for enhancing the value of their shares, such as selling the group to Citigroup, a break-up — including flotations of Coutts and Citizens — or even a leveraged buy-out of the group.
Analysts at Merrill Lynch last week said in a research note that the Edinburgh-based bank and its investors should examine a range of options to boost value.
Merrill Lynch’s bank analyst John-Paul Crutchley said: “Based on our analysis, RBS is the most undervalued UK bank stock with the greatest possible value creation from an leveraged buyout.
“Its higher profitability and cash flow generation coupled with a lower potential initial equity investment could deliver a leveraged buyout with a net present value of around £35 billion and an internal rate of return of 18 per cent.
But Crutchley said obstacles to such a course would include “the three Rs” — regulators, ratings agencies and risk aversion.
He said that, given the size of UK banks, selling out was not a viable option for all, as there are not many potential acquirers. Crutchley said the only bank large enough to acquire RBS is Citigroup, but that JP Morgan and Bank of America could digest other members of the UK’s big four — by which he means Lloyds TSB, Barclays and HSBC.
He said: “We continue to be struck by the structural undervaluation of the UK bank sector.” Crutchley then suggested UK clearing banks should be doing more to address this, and if not, investors ought to take matters into their own hands.
Crutchley suggested that RBS — whose brands include Royal Bank of Scotland, NatWest, Ulster Bank, Coutt & Co, Adam & Co, Child & Co, Isle of Man Bank, Drummonds, Citizens, Direct Line and Churchill — and the other UK banks could “tough it out”. But he dismissed this as “effectively the denial option, with management taking the view that the market will get there in the end.”
This article was published in the Sunday Herald on 20 March 2005