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Sumitomo Mitsui to Buy RBS Aviation in World’s Biggest Plane-Leasing Deal

Royal Bank of Scotland Group Plc is selling its aviation leasing unit to Sumitomo Mitsui Financial Group Inc. (8316) for about $7.3 billion, the biggest disposal by the state-owned lender since its U.K. government bailout in 2008.

The sale of the Dublin-based unit should be completed by the end of the third quarter, leaving Japan’s second-biggest bank by market value and partner Sumitomo Corp. in control of a fleet of 206 aircraft, with commitments to buy another 87 by 2015, RBS said in a statement. The Tokyo-based group fended off bids from China Development Bank Corp. and Wells Fargo & Co. (WFC) as its President Koichi Miyata sought overseas acquisitions to counter slowing growth at home.

RBS shares have rallied 23 percent this year as the Edinburgh-based bank announced about 4,800 job cuts and asset sales that have reduced its so-called “non-core” division by more than 160 billion pounds ($246 billion) to less than 100 billion pounds in three years. The bank said last week it plans to sell or close its cash equities, mergers advisory, corporate broking and equity capital markets operations.

“This is a milestone in terms of RBS running down its non- core business and marks another step in the right direction,” said Gary Greenwood, an analyst at Shore Capital in Liverpool. “These were long-term assets which aren’t particularly liquid, which meant RBS had to hold quite a bit of capital against them.”

RBS gained 1.8 percent to 24.85 pence at the close in London. Sumitomo Mitsui closed 1.2 percent higher at 2,211 yen in Tokyo, while Sumitomo rose 1.1 percent to 1,045 yen.

Insurance Unit

Further RBS asset sales this year may include the bank’s insurance unit, including Churchill and Direct Line, which could raise as much as 4.7 billion pounds, Shore Capital’s Greenwood said. RBS has to sell the business by 2013 to comply with a European Union ruling following its receipt of state aid.

RBS, which received 45.5 billion pounds from taxpayers during the world’s biggest bank bailout, will use the proceeds to strengthen its core Tier 1 capital position and reduce wholesale funding requirements, it said yesterday.

The deal is the biggest overseas takeover by a Japanese bank since at least 1999, according to data compiled by Bloomberg. The Tokyo-based firm bid together with its main lending unit, as well as Sumitomo Mitsui Finance & Leasing Co. and trading company Sumitomo, it said in a statement.

“It’s positive to see Sumitomo Mitsui obtain a business of this type, which generates higher profit margins than operations in its home market,” said Yoshinobu Yamada, an analyst at Deutsche Bank AG in Tokyo. “Japanese banks will be significant players in acquisitions of European assets.”

Additional Purchases

Sumitomo Mitsui became the leading bidder after concern grew that state-owned China Development Bank (SDBZ) would struggle to gain government approval in a timely manner, a person with knowledge of the talks said on Jan. 12.

Barclays Plc’s Barclays Capital unit and bankers from Sumitomo Mitsui’s Nikko unit are advising the Japanese bank on the deal, along with Milbank Tweed Hadley & McCloy LLP. Goldman Sachs Group Inc. and Clifford Chance LLP are advising RBS.

Sumitomo Mitsui plans to buy “several hundred billion yen” of assets being sold by European lenders, Miyata said in a December interview.

Project Financing

Other Japanese lenders are also seeking to purchase assets abroad. Mitsubishi UFJ Financial Group Inc. (8306), the country’s largest bank, aims to become one of Asia’s three biggest lenders by profit through acquisitions, funding infrastructure projects and expanding retail banking, Deputy President Tatsuo Tanaka said in an interview last week.

Tokyo-based Mitsubishi UFJ agreed in November to buy RBS’s Australia-based infrastructure advisory business. That followed the lender’s 3.9 billion-pound acquisition in 2010 of RBS’s project financing assets in Europe, the Middle East and Africa.

Lessors buy planes and then lease them to airlines for monthly fees, seeking to profit from the residual value by selling aircraft after about 15 years. RBS Aviation has the seventh biggest fleet.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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