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  • Peter Smith

MONDAY 29TH NOVEMBER 1999: Here Comes RBS!

As we expected following the comment at the weekend, RBS announces its bid this morning. It is worth 0.968 of an RBS share (why didn't they make it 1 and save our calculator batteries?) plus £3.05 of Loan Notes. That makes it worth slightly more than the BoS bid, but this is constantly changing given that both offers are largely in shares, and the share prices are volatile.


The top management team is called to a meeting with Sir David et al. He starts by talking about the revised Bank of Scotland bid on Friday. This time, he tells us, he got the phone call from the Governor of the Bank of Scotland just after he'd come back from his run, early on Friday morning. He advised that they were increasing the offer, which Sir David said would of course have to be considered.


RBS entered the picture on Friday. There were informal discussions and our respective advisers exchanged information. RBS were keen to get the NW Board agreement to a recommended takeover, and wanted to impose tight constraints on the timescale. The NW Board then met on Saturday morning and discussed both the revised BoS offer and the outline approach RBS had put forward. After discussion, they agreed neither were acceptable and could not be recommended to the shareholders. NatWest and RBS met on Saturday afternoon, when RBS threatened to withdraw from the contest altogether if NW didn't agree quickly.


"So," Sir David tells us, "I told them I don't believe you, and to stop pissing around!"If they still wanted to bid, they should get on with it and do it. Sir George Younger then rang David on Sunday to say that they would be bidding, and that the terms would be broadly in line with the previously discussed informal offer. Today there has been an analysts meeting. Share price movements are volatile and difficult to interpret, a real problem in terms of assessing the value of each bid. Since their bid, RBS shares have fallen today from around 1320p to 1240p.


In terms of our defence, he is very confident of seeing off BoS. Masterton, who is supposed to be the man to run the new business, has become invisible, and they just do not have credible experience; for instance, they have a "Toytown Treasury" operation compared to ours.


Sir David hands over to Ron to talk about our defence strategy. We are now focusing on five businesses (Retail, Cards, Corporates, Wealth Management, GFM) that made £1.5 Billion profit last year and £0.9 Billion first half this year. We can add more value and take out another £525 million of cost. We will increase the dividend by 25% and return more capital to shareholders. He does not think there is anything BoS do that will appeal to shareholders; their bid has no merit.


However, he can't say the same about RBS. We have to take a careful look at what they are saying and take our time analysing it.


There are no easy answers to the internal people and motivation issues. We should be honest and open, let our staff know our feelings and share our confidence that we can win. But we all have to understand this is a long slog; there is still a long way to go before we will be through it. (The entry of RBS into the fray means that the process restarts in terms of timing. This is going to run into February now by the look of it, assuming nobody else joins in!) Ron invites questions.


Stefan Harris, MD of GFM, asks whether we would think the BoS bid could make sense if we were the controlling party. No, says Sir David, it just doesn't add value. When we were considering merger candidates earlier in the year they were not on the radar screen. However, RBS were; there could be added value in that tie-up.


Tim Jones asks if year-end valuation issues motivate the big investors and might drive behaviour. Probably not, is the answer, some are underweight in banking stock, some overweight, so probably not a big factor overall.

In their press release RBS offers a different strategy to BoS. They want to be as friendly as possible, so although the bid is "unsolicited", they do not want it to be seen as "hostile". The only way mergers can work is co-operatively. They don't want to do most of the disposals we are now planning; probably only Gartmore and maybe Greenwich US would go. Their expectations of savings are similar to ours, plus £600 million of de-duplication savings. They would not make any further branch closures, and would keep two competing Retail brands on the High Street, choosing the best IT platform for migration. They see great opportunities in the Corporate Banking area, and in "bancassurance", possibly on a pan-European basis, through the tie-ups they already have with CGU, Banco Santander, and Societe Generale.


Of course, this makes it harder for us to rubbish the RBS strategy because the bancassurance concept was the foundation for our ill-fated bid for Legal and General. In fact, it looks like RBS are offering something that is actually very close to Sir David's ideal strategy- just with a different senior management team running it. At this stage, I think a lot of us are putting our money on a higher RBS bid getting agreement from the NW Board, which might not be bad news for some of us at least. An agreed merger would presumably lead to a much more co-operative approach than if BoS succeed. The hostility now between NW and BoS, particularly following the "IT integration" arguments, would not seem to bode well for a co-operative approach to integration if BoS do win.


We publish another document for shareholders. The timing is unfortunate really. With the RBS bid, the clock goes back to zero in terms of the schedule for the whole process, and our document will not get much attention as I suspect all the comment will be focused on the RBS bid.


While our last document was an attack on BoS, this one is more positive, emphasising the positive things we are doing or will do; it is headed, "NatWest value for NatWest shareholders." It talks about the transformation already underway at NatWest; the cost savings we will deliver; divestment and capital to be returned to shareholders; and then finishes with the by now traditional attack on the BoS bid as high risk and low reward. Given the timing, there is of course no mention of the Royal Bank bid, which also dilutes somewhat the power of the document.


We make much of the new top team, combined with the experience of people like Bernard and Paul Myners. It is good to see Bernard getting a name-check, as he has seems to have been a little marginalized since Ron arrived. There is going to be a new incentive plan for "senior executives", based on delivering return on equity over the next three years in the top quartile of a peer group of competitors. I have heard this is aimed at about the top thirty managers; I suspect there will be a number of people like me wondering now if they fall into this exclusive group!


Anyway, RTP and other initiatives are (apparently) all on track to deliver savings and headcount reductions. We will save £525 million by 2002 through a range of initiatives. I feel guilty here; we really should have got more focus on purchasing somehow among the list of cost saving activities. I am sure some of the activities listed are no more certain than our e-procurement and other planned savings. However, I do worry about the risk of double-counting as some of the things listed have an element of "purchasing" savings within them. But I feel I've missed an opportunity here both to promote the function better and to contribute more to the defence effort.


We will return capital to shareholders by increasing the dividend 32%, a share repurchase scheme, and further capital returns when Greenwich, Gartmore, Equity Partners and Ulster have been sold. The new Group will concentrate on the five core franchises, all of which are strong businesses with good growth prospects. There is then a detailed section looking at the prospects of each of those businesses. Cards, Corporates, GFM and Wealth management all have good stories to tell; Retail is more about realising the potential to build on a strong but under performing customer franchise. We also talk a little about thee-Bank; we have probably underplayed this so far, but now we can make more of our success here. We are launching personal Internet banking, including a very interesting tie-up with Yahoo! , which all looks genuinely exciting.


The final section describes the BoS bid as offering an inadequate premium, and mentions again the flawed proposals in areas like IT, although this is very brief, as this is obviously designed as a positive, looking forward sort of document. It is good, but the timing is unfortunate given the RBS bid, and it feels a little that we are on stronger ground attacking the BoS proposals than when we are talking up our own performance, either present or future. This attempt is thoughtful and professional, but I cannot see anything in terms of a "Wow!" factor. I would put money on most analysts skimming through this fairly quickly.

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