Can the Scots Spoil Barclays' ABN Deal?

A group led by Royal Bank of Scotland has come up with an offer for the Dutch bank exceeding Barclays'. ABN's board members must take note

Ever since Amsterdam-based ABN-Amro (ABN) accepted a $91 billion takeover offer from Barclays (BCS) on Apr. 23, Royal Bank of Scotland Chief Executive Officer Fred Goodwin has been fuming. Goodwin was preparing his own offer which would have landed him Chicago-based LaSalle Bank to add to his U.S. holdings. Barclays and ABN crossed Goodwin up by agreeing to sell LaSalle to Bank of America for $21 billion (see, 4/23/07, "Barclays-ABN Deal Signals a Shakeup").

Now Goodwin has made his riposte, coming in with a preliminary offer on Apr. 25 that, at first glance, looks better than Barclays'. RBS is offering about $98 billion for ABN-Amro, with 70% cash and 30% RBS shares. That's around 13% better than the value of Barclays' all-share offer at the closing price on Apr. 24. RBS is being joined by Spain's Santander (STD), whose chairman, Emilio Botin, is a close associate of Goodwin's. Belgian-Dutch banking and insurance giant Fortis rounds out the group.

The ABN board would seem to have little choice but take the RBS approach seriously. Indeed, the London-based Children's Investment Fund (TCI), a hedge fund that has been prodding ABN to improve its stock price, issued a statement strongly supporting the RBS bid (see, 3/19/07, "Hedge Funds Hit European Blue Chips").

More Overlap, Higher Offer

"The Board of ABN AMRO must recommend the RBS consortium offer, subject to the diligence condition being met, and terminate the LaSalle Bank sale," TCI said. The new proposed bid comes just ahead of ABN-Amro's Apr. 26 annual general meeting, where there may well be fireworks.

It could be a long battle over ABN-Amro. Jean-Pierre Lambert, an analyst at Keefe, Bruyette and Woods in London, figures "…an optimal consortium" could afford to raise the offer by another 15%. Barclays also might have some more headroom. But analysts reckon the RBS-led consortium can probably afford to pay more than Barclays because there is more overlap among the three businesses and those of the big Dutch bank than there is with Barclays.

The assumption is the consortium would divide ABN's assets among themselves. RBS would take LaSalle and the investment banking businesses, Santander the Italian and Latin American businesses, and Fortis the Dutch commercial and retail business. Lambert thinks "…the consortium has more chance" of winning.

There are many wild cards. ABN's CEO Rijkman Groenink could yet resist the RBS offer because he opposes a breakup, and he may receive support from the Dutch regulators. It could also prove impossible to scotch the agreed LaSalle sale to Bank of America (BAC), which would probably sink the RBS consortium. Most bankers think B of A has agreed to a very high price, which may be hard to top. There is also a $200 million breakup fee.

Avenues To New Clients Sought

A big attraction of the Barclays offer for ABN was that it would have left the bank largely intact with relatively few layoffs. Barclays CEO John Varley outlined job cuts of around 24,000, or 10% of the merged companies' employees—in line with normal turnover and attrition. But ABN looks less and less in control of its destiny. Lambert of Keefe, Bruyette figures that RBS' Goodwin, who is known as "Fred the Shred," could weed out $5.8 billion in costs compared to the $3.8 billion that Barclays is promising.

Whatever happens, the bids show how much value lies in Europe's under-managed banks as avenues to new clients and capital. Barclays was particularly attracted to ABN's operations in Italy and Asia and its rich pool of private clients in northern Europe. The Barclays bid already represented a 33% premium on ABN's share price as of Mar. 16.

Both groups figure they can make big gains by bolting on ABN operations to their own systems, thus gaining big economies of scale. Whoever the buyer ultimately turns out to be, ABN's fate seems more likely to resemble Fred Goodwin's tough-minded approach to a takeover prize than the more genteel offer that Barclays was proposing.

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