There’s good news for shareholders in ABN Amro today: the consortium led by
Royal Bank of Scotland has officially
said that it will pay €71.1 billion ($95.7 billion) for the Dutch bank.
The even better news is that 79% of the bid is in cash.
But what’s good news for the target is not always good news for the bidders,
and the huge cash component of their bid means that they have a lot of work
to do in both the debt and equity markets. On the equity side, RBS and Fortis
will both issue €15 billion in new shares, while Santander will issue €10
billion. On the debt side, a lot of the financing seems to be coming from the
issuance of new Tier 1 capital, which is the most expensive type of debt that
a bank can raise. RBS is issuing €6 billion, and Fortis is issuing €5
The banks say they have financing lined up — and I’m sure they do. But I’m
equally sure they haven’t locked down pricing on these new securities, and there’s
always a chance they might get an unwelcome surprise. Look at what happened
to Tribune, after it was acquired by Sam Zell. According to
the debt part of the deal was much harder to raise than had been anticipated:
Tribune sold more than $7 billion in loans last week to fund the tender offer
as part of the deal and to refinance some existing debt, the paper said. But
the company reportedly had to agree to higher interest rates than planned
on most of the debt and to pay down some loans within two years, rather than
the seven-year term it sought.
This could be a sign of investors finally drawing a line in the sand. I think
the chances of there being serious repercussions for RBS, however, are slim.
Banks’ Tier 1 capital is extremely junior and subordinated, to be sure, which
does make it more expensive. But no European bank has defaulted on its Tier
1 debt in living memory, and there’s a general feeling in the market that banks
the size of RBS are simply too big to fail in such a manner. I have a feeling
the bidders, if their bid is accepted, will get pretty attractive terms.