Will Project Rainbow End RBS Blues? - Analyst Blog

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W&G Investments Plc, the investment vehicle headed by Tesco PLC 's ( TSCDY ) former director of finance, Andrew Higginson, is set to make a bid worth £1.5 billion ($2.4 billion) for The Royal Bank of Scotland Group plc ( RBS ) branches.

Royal Bank of Scotland is yet to tide over its blues and still remains 81% owned by U.K. taxpayers. Further, private ownership looks unlikely in the near future. The bank has been ordered by Europe's regulators - European Union - to sell as many as 315 branches to comply with state-aid regulations, under a project named Project Rainbow.

W&G Investments is ready to shell out approximately £1.1 billion in cash apart from £400 million, depending on the performance of the business on completion of the deal. W&G Investments has also raised £15 million through a share sale to fund a vigilant examination of the Project Rainbow business.

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. Royal Bank of Scotland - which started out as a regional bank in Edinburg - became Scotland's own economic miracle, on 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.  

Others in the Fray

In October, Project Rainbow suffered a setback when Banco Santander, S.A. ( SAN ) stepped out of an agreement to purchase the branches.

Other than W&G Investments, the other final round bidders include a combination of private equity firms Corsair Capital and Centerbridge. There is yet another bid led by AnaCap Financial Partners, in collaboration with U.S. private equity giant, The Blackstone Group L.P. ( BX ).

However, Corsair and Centerbridge, unlike W&G Investments, will not buy the Project Rainbow branches outright. The duo will probably operate as partners of Royal Bank of Scotland until a stock flotation in the future.

Conclusion

Initially, the British government was commended for dealing with 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 strapping strategy for The Royal Bank of Scotland. The British administration has pressed the bank to reduce its investment bank, shrink its U.S. unit and refocus on the U.K. business.

Obediently following the orders, The Royal Bank of Scotland has 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 IPO. It would have sold off the branches if the deal with Banco Santander had not hit an obstacle due to delays in 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, the bank will be able to wade through troubled waters and regain its former glory.



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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BX , RBS , SAN , TSCDY

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