Virgin Money and US player lead race for RBS’s branches

VIRGIN Money and American private equity group JC Flowers are the front runners to buy 316 branches from Royal Bank of Scotland in a bid battle that could see the £1.65bn price tag drop by as much as £1bn.

RBS was due to sell the branches to Santander, but the Spanish bank pulled out of the sale on Friday.

Richard Branson’s Virgin Money, which lost out to Santander in the original auction, is keen to build up its UK banking business after its takeover of Northern Rock.

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JC Flowers is also looking at the branches, but will want assurances on the quality of the assets and that the same IT problems that deterred Santander will not affect its bid.

RBS’ shares closed down one per cent at 268p yesterday.

JC Flowers is keen to expand in the UK where it already owns a small building society, Kent Reliance.

Other possible suitors include NBNK, the venture set up to buy UK banking assets by former Lloyd’s of London insurance head Peter Levene, but NBNK is being wound up after losing out to the Co-op in a battle to buy Lloyds’ 600 branches.

NBNK’s former boss Gary Hoffman was appointed chief executive of Hastings Insurance yesterday.

Co-op is thought to be too busy integrating the branches it bought from Lloyds to make a bid.

Yorkshire Bank’s Australian parent NAB was involved in the original auction, but it is currently downscaling its UK operation with the closure of several branches and the loss of 1,400 jobs.

NAB declined to comment about whether it would re-enter the fray although analysts believe it unlikely at a time when Australian investors would like the company to pull out of the UK altogether.

Other possible candidates include Metro Bank, which has ruled itself out saying it is focused on organic growth.

Tesco Bank said it is not interested in buying branch networks.

Sweden’s Handelsbanken, expanding in the UK, declined to say if it was interested in the branches, but it has previously focused on organic growth in the UK.

Analysts at Investec said RBS may well have to settle for a price that is £500m to £1bn less than the £1.65bn agreed with Santander. If RBS fails to agree a price with a buyer it may consider a stock exchange flotation or it could ask EU regulators to extend the deadline for selling the branches.

RBS could struggle to complete a sale by the 2013 deadline laid down by the EU.

The bank was ordered to sell the branches as a condition of its Government rescue at the height of the banking crisis.

Analyst Shailesh Raikundlia, at Espirito Santo, said: “RBS now has only 13 months to find another buyer or float the business.

“Either way, we expect the revised price to be significantly lower.

“The price set in August 2010 looks somewhat expensive now. The UK macro environment doesn’t look appealing in the medium term and capital preservation ranks as a higher prior- ity.”

RBS’ chairman Sir Philip Hampton has said the bank could ask the EU if it can keep the branches.

But yesterday the European Commission said it was not going to ease up on RBS’ restructuring and that, if RBS wants to keep the branches, it will have to give up something equally valuable.

The commission also said it had not received any request from UK authorities in relation to RBS.

Investec analyst Ian Gordon said: “The original terms agreed appeared generous at the time, and even more so in the light of loss-making Lloyds Banking Group’s recent ‘giveaway’ of its mandated 632 branch disposal to the loss-making Co-op.

“Early speculation cites Virgin Money and others as potential alternate bidders, though unless the European Commission’s terms are materially relaxed, we believe that a loss on disposal of £500m or more now appears likely.”

The Spanish lender agreed in August 2010 to buy the assets, but it pulled out when it became apparent that a revised target for the purchase to be completed by the end of the year would not be achieved.

The deadline has already been put back twice and a review by management consultancy Accenture reportedly indicated it would be mid 2014 before the deal was completed.

Buying the RBS division would more than quadruple Virgin’s branch network and add a small and medium-sized business bank to its offering.