RBS Said to Ask Branch Bidders to Buy Bond Ahead of Unit’s IPO

Royal Bank of Scotland Group Plc is telling bidders for the 316 branches it’s selling they will be able to buy a bond convertible into shares of the division after an initial public offering, according to four people with knowledge of the talks.

Bidders would invest in the so-called pre-IPO convertible before the division, known as Williams & Glyn’s, is taken public, said the people, who asked not to be identified because talks are private. While the buyer would likely get a seat on the division’s board, RBS managers would continue to run it before the offering, the person said. The buyer would get a coupon on the bond before an IPO in 2015 at the earliest and a minority stake in the unit thereafter, the person said.

RBS, Britain’s biggest publicly owned lender, has to sell the outlets by 2014 to comply with European Union state-aid rules after receiving 45.5 billion pounds ($69 billion) in the biggest banking bailout in the world in 2008 and 2009. The bank is offering the alternative structure after Banco Santander SA, Spain’s biggest bank, abandoned its 1.7 billion-pound bid for the branches in October, citing completion delays. Lloyds Banking Group Plc, Britain’s biggest mortgage lender, is still trying to complete the sale of 632 branches to Co-Operative Bank Plc after more than eight months of negotiations.

RBS and its adviser, UBS AG, asked potential buyers to submit bids for the bond before a deadline this week, the people said. Some of the U.K.’s biggest fund managers are competing with offers from U.S. private equity firms, people with knowledge of the discussions said on March 20.

Schroders, Flowers

Bidders for the branches include a group of 20 U.K. money managers, including Schroders Plc and F&C Asset Management Plc, people with knowledge of the matter said then. JC Flowers & Co., the private-equity firm started by former Goldman Sachs Group Inc. banker J. Christopher Flowers, and Apollo Global Management LLC are making a joint offer as is Centerbridge Partners with Corsair Capital, the people said. AnaCap Financial Partners LLP and Virgin Money Holdings (U.K.) Ltd. are making separate bids, they said.

Officials at the bank in London declined to comment.

RBS Chief Executive Officer Stephen Hester said last month that while the lender would prefer to sell the unit through an IPO, it was open to offers. The bond would give Edinburgh-based RBS more time to separate and improve operations of the unit and allow the bank to benefit from the earnings while simultaneously showing the EU that it’s made progress with the disposal, one of the people said.

European Commission

RBS has signaled to the European Commission that it may seek an extension to the branch-sale deadline, though it hasn’t formally asked for one yet.

The division for sale has 21.5 billion pounds in deposits and serves about 2 million small businesses and consumers. It made 305 million pounds in operating profit in 2012, about 10 percent of RBS’s operating profit that year.

Officials at AnaCap, Virgin, Schroders and F&C couldn’t be immediately reached for comment outside of regular business hours. Susanne Clark, managing director and general counsel at Centerbridge, and Robert Siegfried, a spokesman for Corsair at Kekst & Co., declined to comment. Representatives for Apollo and JC Flowers didn’t return phone messages.

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