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Lloyds Banking Group plc (LSE:LLOY) has agreed to sell 632 of its branches, including the TSB and Cheltenham & Gloucester brands, to the Co-operative Group plc for £350 million. The deal will make The Co-operative Group a major competitor in British banking, as it will represent 7% of the UK banking network with about 4.8 million customers, including 3.1 million personal current accounts, representing £24 billion in fully matched assets and liabilities. Lloyds expects the completion of the divestment by November 2013, following a sale and purchase agreement to be signed by both parties.
“The divestment is not expected to have a material effect on the future profitability of the Group,” Lloyds said in a statement.
Share price inched 0.4% to 29.895 pence at 10:28 AM GMT, following the news.
The Reason for the Sale
Lest we forget:
- The UK banking sector has been in a shambles as a result of the subprime lending fiasco.
- Lloyds received a £20.3 billion bailout package from the British government.
- It has been fully three years since the European Union ordered Lloyds to divest a portion of its retail and commercial assets.
This is not a sale of convenience, at least not for Lloyds. This is a forced sale. That removes a lot of the luxury of seller leverage at the bargaining table. One observer referred to the sale as “an albatross around the neck of Lloyds’ management.” Lloyds’ CEO, António Horta-Osório, politely referred to the group’s obligation, saying, “Today’s agreement is an important step in meeting our obligations under the mandated sale of our branches.”
The Terms & Status of the Sale
Having selected the Co-operative Group as preferred bidder, the two companies have entered into a non-binding agreement, whereby Co-Op will acquire the shell company, Verde, which is composed of 632 Lloyds’ branches, for an initial £350 million. In addition, Co-Op will be obligated to pay up to an additional £400 million in present value based on the performance of the acquired branches from the actual time of sale until 2027. Horta-Osório cited the benefit of this deal structure as an opportunity for Lloyds to share in the future financial success of the sold entity. Lloyds and Co-Op will now move toward drafting a details sale and purchase agreement, coordinating with the FSA to gain their formal approval.
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.
The Effects of the Sale
Lloyds could post a loss as high as £1.15 billion on the sale itself, having sold the package at 50% of book value. In addition, Lloyds will suffer the ongoing loss of revenue generated through the branches sold. On the other hand, Lloyds gets out from under the weight of the mortgages originated in those branches. And, because the sale was originally expected to include £68 billion in assets, the potential post-sale earnings lost will not be as severe now that the deal includes only £24 billion.
Co-Op looks to be the winner in the sale, at least in the short term. Its presence in the banking sector will increase to about 1,000 branches. It will gain about 5% of all current accounts in the UK, which immediately ups its market share from 2% to 7%. This is a significantly strategic percentage considering the Independent Commission on Banking’s standard for a stand-alone bank to compete successfully with the big boys is a 6% market share. Although Virgin Money, Tesco, and Metro Bank are seeking a strong presence in the banking sector, this deal will put Co-Op in the pole position as the race begins. Co-Op CEO, Peter Marks, sees the acquisition as “the most significant development in high street banking in a generation.”
Government and watchdog observers have greeted the sale with favor. The Chancellor of the Exchequer’s office sees the transaction as “another step towards creating a new banking system for Britain.” The Independent Commission on Banking said that consumer banking would “be much improved” by the presence of a new “challenger”.
