Late last week, The Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) reportedly informed the U.S. private equity (PE) firms JC Flowers and Apollo Management that their joint bid to acquire 316 of its branches has been rejected – bringing down the number of bidders left in the race for the branch sale (dubbed ‘Project Rainbow’) to three.  The global banking group which is majority owned by the U.K. government, was required to sell the branches spread across England, Wales and Scotland as part of its bailout agreement with the European Commission (EC) in 2009, and has been working hard to get them off its books for nearly three years now. RBS had inked a deal to sell the branches to Banco Santander, S.A. (NYSE:SAN) in August 2010, but the deal fell through last October when integration issues forced the latter to pull out. ((Statement on disposal of UK Branch-based Business, RBS Press Releases, Oct 15 2012))
While the branch sale is expected to materialize by the end of the year, RBS will have to settle for a figure between £800 million to £1 billion ($1.2-$1.5 billion) from the sale – well below the £1.65 billion ($2.5 billion) it had inked the original deal with Santander for.
We maintain a $11 price estimate for RBS’s stock, which is at a premium of about 10% to current market prices.
In return for its £45.5 billion bailout in the aftermath of the global economic downturn of 2008, the EC laid down a list of restrictions as well as compulsory divestments that Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) had to undertake.  The requirements included the disposal of the group’s Global Merchant Services (WorldPay) and RBS Sempra Commodities by the end of 2013, and a complete exit from the insurance business by the end of 2014. The group’s branches – 311 RBS branches in England & Wales and 5 NatWest branches in Scotland – which focused on certain SME and corporate activities were also earmarked for sale. The restrictions imposed also forced the group to cut down on investment banking operations, to stay out of the list of top five global debt originators with Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) being banned from restarting its non-core activities until the end of 2014. ((Statement on disposal of UK Branch-based Business, RBS Press Releases, Oct 15 2012))
Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has stuck to the restrictions, sold out of its stake in WorldPay and RBS Sempra Commodities and also initiated the spin-off of the insurance business as the Direct Line Group through an IPO. It would have sold off the branches too if the deal with Santander had not been snagged by technology and separation-related complexities. 
These branches had about £21.7 billion ($34.8 billion) in customer deposits and nearly £18.7 billion ($30 billion) in outstanding loans at the end of H1 2012 – making it a sizable part of RBS’s core business banking division, which reported $170 billion in outstanding loans at the end of 2012, as shown in the chart above. The deteriorating economic conditions in the region and the declining profitability of the business over recent years reflects the fact that the current bids for the business are about half of what Banco Santander, S.A. (NYSE:SAN) had offered more than two years ago – something Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) will just have to make peace with.