Thursday's "heads of terms" agreement follows months of talks over a sale, which Brussels ordered as penance for a government bailout. The "Verde" deal will give Co-op 632 branches, with a 24-billion-pound balance sheet attached. Earn-out payments, based on profitability over 15 years, could be worth 400 million pounds more in today's money. But even the maximum payout would be half the 1.5 billion Lloyds once hoped for.
Poor auction dynamics did not help. Being a forced seller usually hurts. Still, viewed in comparative terms, the deal looks less disappointing. Verde comes with 1.5 billion pounds of equity, so the sale equates to half book value. That is broadly in line with the quoted valuations for Lloyds, RBS and Barclays.
Meanwhile, a deal with the Co-op was simpler than the main alternatives. It was easier than floating the carved-out business, or selling to bid vehicle NBNK. Plus, the package being sold has shrunk. Verde's total liabilities and assets now match, where the plan originally included transferring a big slug of extra loans unmatched by deposits.
Under an outsourcing deal, Verde business will continue to run on Lloyds banking systems and Co-op will transfer its existing customers over as well. That is unusual. But transferring accounts is tricky, so it makes sense to utilise the bigger platform.
Britain's retail banking oligopoly has proved a tough nut to crack. And the country's deposit base is unlikely to grow fast. But the Co-op has a readymade base of 7 million members, and many more customers at its supermarkets and elsewhere. Now it has a genuinely nationwide bank network, with about one in 10 UK branches, it has a genuine opportunity to build a meaningful financial services business. The timing looks good, at least as far as public opinion is concerned. No-one has a bad word to say about mutuals - while rate-rigging and money-laundering scandals mean big banks could hardly be in worse odour.
CONTEXT NEWS
- On July 19, Lloyds Banking Group and the Co-operative Group said they had agreed "non-binding heads of terms" for the sale of 632 Lloyds bank branches, with a balance sheet of about 24 billion pounds ($38 billion). The pair expect the deal to complete by the end of November 2013.
- Under the deal, which follows months of talks, the Co-op will pay 350 million pounds upfront and make future payments with a present value of up to 400 million pounds, based on performance to 2027.
- The Co-op is Britain's biggest mutually owned organisation, with interests ranging from food retailing to funeral homes and car dealerships.
- The divestment unit, known as "Verde", will give the Co-op 4.8 million new customers. After the deal closes, the member-owned group will have about 1,000 branches, or about 10 percent of Britain's bank branch network. It will hold about 7 percent of all current accounts, creating a challenger to the five big players that dominate UK retail banking.
- Lloyds was forced by the European Commission to sell the branches as a penance for a government bailout that left it 40 percent owned by the British state.