RBS Prices Citizens IPO Below Expected Range to Value Bank at $12B

LONDON (The Deal) -- The U.K.'s Royal Bank of Scotland Group (RBS)  said on Wednesday it had sold a quarter of Citizens Financial Group below an indicative price range to value the Providence, R.I. lender at $12 billion.

Citizens shares were due to start trading on the New York Stock Exchange later Wednesday after the Edinburgh bank sold 140 million shares at $21.50 apiece, below a planned range of $23 to $25. Investors appear to have been deterred by years of weak returns at Citizens, the 13th-largest retail bank in the U.S., with $130.3 billion of total assets at the end of June, and a book value equivalent to $23.39 per share.

Investec Bank plc analyst Ian Gordon said the IPO outcome is "hardly fatal, but perhaps market expectations had (once again) got over-extended?"

"Unfortunately for RBS, market timing and an element of (reported) investor resistance have conspired to reduce the price to $21.50, equivalent to 0.9 times tangible net asset value," he noted, saying that the reduced sale proceeds may "take some of the froth out of the RBS bull case" as he reiterated his hold recommendation on the stock. But Gordon added the "bigger picture" was the capital benefits of deconsolidating the U.S. business.

Royal Bank shares by early afternoon had erased initial losses to trade unchanged in London. Royal Bank said it will use the gross proceeds of just over $3 billion from the sale for "general corporate purposes." It could sell an additional 3.75% of Citizens under a greenshoe but its remaining stake, of between 71.25% and 75%, will be subject to a 180-day lockup.

The 81% state-owned bank's former CEO Stephen Hester had originally resisted pressure to divest the U.S. business as he forged a slimmed-down bank centered on U.K. and U.S. retail and commercial banking while slashing investment banking and other esoteric or far-flung assets. But as losses mounted and the restructuring struggle dragged on he caved in to a government which had provided Royal Bank with £45.5 billion ($74.6 billion) of bailout funding at the height of the crisis. He was later replaced at the helm by insider Ross McEwan, who brought forward the Citizens IPO and set in train the divestment of the entire business by the end of 2016.

In a statement on Wednesday, McEwan said: "The sale of Citizens is an integral part of the RBS capital plan. This IPO represents a key step on the path to full divestment. Selling Citizens will significantly improve our capital position and help us to create a strong and secure bank that can continue to fully support the needs of its customers."

Dealogic Holdings Ltd. noted that the Citizens IPO was the No. 2 in the U.S. this year behind Alibaba Group Holding Ltd. (BABA), which raised $25 billion last week.

Morgan Stanley and Goldman, Sachs & Co. are joint global coordinators of the IPO, with JPMorgan Chase & Co., Barclays plc, Citigroup Inc., Deutsche Bank AG, Royal Bank itself and Wells Fargo Securities as joint bookrunners.

Other banks in the IPO line-up are Credit Suisse AG; UBS; Jefferies & Co.; Keefe, Bruyette & Woods Inc.; Oppenheimer & Co.; RBC Capital Markets; Sandler O'Neill & Partners LP; Evercore Partners Inc.; ING Groep NV; Sanford C. Bernstein; Guggenheim Securities; Lebenthal Capital Markets; and Williams Capital Group LP.

Stephen Gannon, general counsel and chief legal officer of Citizens Financial, is advised by Nicholas Kronfeld of Davis Polk & Wardwell LLP.

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