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Lloyds Banking Group (LSE:LLOY) has a small problem.
Question: When is the best time to sell something?
Answer: When someone wants to buy it.
Situation: Lloyds Banking Group needs to sell 630+ bank branches.
Problem: No one wants to buy them.
In December 2011 the news was that the Co-Operative Group was the preferred bidder to purchase the branch banks, a condition imposed upon Lloyd’s by the European Commission following the bank’s bail-out in 2008. On 12 April 2012 ADVFN reported that things had changed and that NBNK Investments had taken over as the leading candidate as a buyer. The initial deal with Co-Operative had “consistently been bogged down by regulatory issues.” Lloyds had considered floating Verde in an IPO, but as Lord Levene of NBNK said, his bank “offers none of the downsides to Lloyds of a standalone IPO.” Interesting thought. Remember that.
By 19 July 2012 everything had changed. The news changed dramatically, indicating that Lloyds would, afterall, sell the branches separately branded as TSB and Cheltenham & Gloucester for a proposed initial sum of £350 million. Lloyds pointed to a consummation of the sale by November 2013. Following that announcement Lloyds’ share price was 29.89. In fact, the entire banking community see to be in favor of the potential deal. The ADVFN report revealed that “The substance of the purchase will include approximately £1.5 billion of equity capital. It will also carry with it about £11 billion of risk-weighted assets. The plan is to complete the transaction by November 2013. During the summer of 2013, Verde will be rebranded as TSB, the name that it will ultimately be sold as.”
By 26 July 2012 Lloyds had issued its first half financials, reporting a £676 million loss (a 70% improvement year on year). Indicating that Lloyds would be taking “at least a £700 million bath on the sales of the Verde Group branches to Co-Operative,” ADVFN also noted that “Lloyds was faced with a deadline to dispose of the branches during a period that is definitely not a seller’s market.”
Between than an now Lloyds share price has managed to gain ground into the low-to-mid-50’s. What will happen next is difficult to ascertain , because the deal with Co-Operative has fallen through according to an regulatory announcement from Lloyds. Now watch how this all comes together.
“The Co-operative Group’s Board has decided that they can no longer proceed with a purchase of the Verde business given their view of “the impact of the current economic environment, the worsened outlook for economic growth and the increasing regulatory requirements on the financial services sector in general.” In other words, this is still definitely not a seller’s market. No one wants to buy Verde/TSB.
Consequently, “The Group now intends to divest Verde through an Initial Public Offering (IPO), having maintained this option throughout the process in order to ensure best value for our shareholders and certainty for our customers and colleagues.” Although the bank says that it has never ceased preparing for the potential need for an IPO for the branch banks, including the creation of a separate management team and IT operating system, the specter of “the downsides of an IPO” now still looms over Lloyds’ Plan B.
There has been no indication as yet of how much Lloyds expects to glean from the IPO. Nonetheless, at this point, the bank is left with little choice. We will know what investor think before the end of 2013. Lloyds share price was 51.74 at 3:00 this afternoon on a volume of 92.9 million shares.
