labels: Banks general, Insurance - general
RBS abandons sale of insurance business news
06 February 2009

Bailed out by the UK government, the Royal Bank of Scotland has abandoned plans to sell its insurance business to raise capital, as it failed to find a buyer willing to pay £6-7 billion in the current economic gloom, although it had been up for sale since the past 10 months.

The announcement came soon after a £5-billion offer made by private equity consortium comprising BC Partners and Apollo management, backed by former Aviva UK chief executive Patrick Snowball, was turned down by the bank, which as it felt that the offer undervalued the business of its insurance arms, Churchill, Privilege, and Direct Line brands.

The joint offer by BC Partners and Apollo Management would have left RBS with a large minority shareholding apart from the uncertainty of the joint bidders being able to raise enough funds to close the deal.

The auction process, went on for 10 months and firms like Warren Buffett's Berkshire Hathaway, Zurich Financial Services, China's Ping An and Allianz of Germany, were all sent sales memorandum by RBS, but all them shied away from actually bidding.

Private equity firm CVC Partners, jointly with Swiss Re had also bid for the insurance business of RBS, where they had valued the business at £6 billion for a 51 per cent stake, but the government had turned down this offer also.

Government appointed chief executive of RBS, Stephen Hester, said that the sale of its insurance business under current prices, would destroy the value for RBS's shareholders and he now considers it a strategic fit within the retail and commercial operations of the bank as the insurance firms still sells over a thousand policies every week.

In November, the management control of the Royal Bank of Scotland (RBS) went into the hands of the British government as investors took only 0.2 per cent of shares offered in the UK's biggest bank bailout, leaving the government with almost £20 billion ($31 billion) of stock and a majority stake of 67.9 per cent. (See: British government becomes majority shareholder in RBS as investors reject stock offering)

As part of the bank's recapitalisation plan and to increase lending, RBS sold its 4.3 per cent stake in the Bank of China for about £1.7 billion, last month and reaped an estimated £800 million profit from the sale of its BOC shares, which it bought it in August 2005 for £900 million. (See: RBS sells Bank of China stake for £1.7 billion)

At that time, Hester said that by disinvesting in Bank of China, the bank will be able to focus on its core banking business in the UK.

Meanwhile, the bank came for heavy criticism from the government and public over its plans to pay bonuses to its senior staff and traders.

Business scretary Lord Mandelson said that with by rewarding failures with bonuses, RBS risked being alienating itself from the public, "What I would say is please be mindful about how this looks and what public opinion will be as the banker should realise what the public opinion is going to be, he said during the debate at Commons.

The bank has already underwritten nearly £28 billion as losses for 2008, where most of it was derived from the toxic assets in its investment banking division.

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RBS abandons sale of insurance business