RBS follows peers and sells its BOC shares

As expected, the Scottish bank divests its entire stake in Bank of China, raising $2.4 billion of much needed capital.
After a couple of weeks of intense speculation and courting by numerous investment banks, Royal Bank of Scotland finally stepped up to the plate last night and sold all its shares in Bank of China. The HK$18.5 billion ($2.4 billion) transaction was well received, as evidenced by the fact that it was priced at the top end of the range for a fairly modest û at least in the current volatile markets û 7.6% discount.

RBS, which like many other European and US banks is in dire need of capital following large subprime-linked write-offs, had been expected to sell its 4.2% stake in the Chinese bank ever since it was forced to accept ú20 billion ($29 billion) worth of bailout funds from the UK government, which took a 58% stake in the Edinburgh-based lender in return. RBS had been holding the stake in BOC since late 2005 and, while the market value of the stock fell by 44% in 2008, it was still sitting on a profit that was too sizeable to ignore for someone in need of shoring up its balance sheet û never mind that the stake was intended to be strategic.

Since the lock-up on BOCÆs pre-IPO investors expired on December 30, UBS has sold its entire stake and Li Ka-shing Foundation has offloaded a portion of its shares, reinforcing the belief that RBS would follow suit. Last week Bank of America also sold part of its holding in China Construction Bank.

RBS sold 10.8 billion BOC H-shares at HK$1.71, after offering them in a range between HK$1.68 and HK$1.71. At the bottom end, the discount would have been 9.2%. Morgan Stanley and RBS were joint bookrunners for the trade, which accounted for about 18 days worth of trading volume and around 14% of the H-share capital.

There was no information available last night about the level of demand, except that it was extremely strong, but the book was said to have included more than 100 investors from across Asia, Europe and the US. Institutions, private equity investors, hedge funds and private wealth accounts all submitted orders, but a source said allocations appeared to have favoured institutions and private equity in particular.

As is the preferred practice these days, a few key investors were approached before the launch of the deal to ensure there would be sufficient demand within the offered price range. However, the buying interest was likely also driven by the fact that the BOC stock has underperformed its key comparables, i.e. Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) over the past couple of months. Since the beginning of December, or one month before the lock-up on the pre-IPO shares expired, BOC has fallen 25% while ICBC and CCB are down by an average 10%.

One observer notes that BOC is currently trading at a 50% discount to ICBC and CCB on a price-to-book basis and says ôinvestors are comfortable to own BOC at these levelsö. As of a week ago, 14 analysts had a ôbuyö recommendation on the stock, versus 11 ôholdsö and only one ôsellö, according to Bloomberg. The average target price of HK$2.73 implies a 48% upside from current levels.

That said, the selling of BOC stock has gained pace since Li Ka-shing Foundation sold $511 million worth of shares at a 7.5% discount a week ago, with the share price dipping 13.6%. Market watchers have commented that that trade, which was arranged by Merrill Lynch and launched after the close on an overall weak trading day, appears to have been placed in less firm hands than the two preceding deals û UBSÆs self-led sale of $808 million worth of BOC shares on December 31 and Bank of AmericaÆs $2.8 billion sell-down in CCB through UBS and Merrill Lynch û which both resulted in less share price erosion.

While the recent poor performance meant that RBS was able to realise a lower absolute price for its BOC shares than the Li Ka-shing Foundation a week earlier, this was likely a minor issue for the Scottish bank, which paid $1.6 billion for the shares in 2005. As a result, it still secured a profit of about $780 million from last nightÆs sale before expenses, translating into a 49% return on the initial investment.

Despite that, RBSÆs share price fell 7.1% to 51.10 pence in yesterdayÆs trading, underperforming the 0.6% decline in the FTSE 100 index. UK media attributed part of the loss to concerns about a loan exposure to bankrupt US chemicals group Lyondell Chemical.

RBS Group bought the pre-IPO shares in 2005 as part of a consortium, named RBS China, which invested a combined $3.05 billion in return for what became an 8.6% stake after the IPO in May 2006. RBS had a 51.6% stake in RBS China, while Li Ka-shing Foundation held 24.2%; although last weekÆs transaction saw the latter sell about 2 billion of its initial holding of 5.07 billion H-shares. The other members of the consortium include an affiliate of Merrill Lynch and three hedge funds, which havenÆt yet sold any of their shares.

Outside the RBS consortium, Temasek also holds about 10.5 billion shares in BOC that became eligible for sale at the end of 2008. This means that while the RBS divestment will remove some of the overhang on the BOC share price, there is potential for more blocks to emerge in this stock over the next few months.

Meanwhile, speculation of what Goldman Sachs will do with its shares in ICBC is bound to continue. The US investment bank owns 16.6 billion shares, or 20% of ICBCÆs H-share capital, of which 16.5 billion were bought before the IPO. It will be allowed to sell half the pre-IPO shares when the lock-up expires on April 28. On the same date, Allianz and American Express can also sell half of their pre-IPO stakes, which amount to 6.4 billion and 1.3 billion shares, respectively.
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