THE ROYAL Bank of Scotland may have made a strategic error. It is far
too early to be at all certain. But its proposed sale of its
Charterhouse merchant banking subsidiary was beginning to develop rather
long whiskers and not doing too much good to its credibility either. So
yesterday's confirmation that it will receive a total of at least #235m
for the disposal of 90.1% to two European banks has cleared some of the
air.
For the past year, Charterhouse has been taking up too much management
time -- now chief executive George Mathewson can get on with the job of
developing Royal's core business of retail banking and the Direct Line
insurance arm without his having the uncomfortable feeling of having a
cuckoo in the nest. But there is the question as to whether ceding
control of what will become the first genuine European investment bank
is correct.
In the last year since a fundamental change of direction at the Royal,
the potential conflicts and different attitudes between St Andrew Square
and Charterhouse's Victor Blank were building up with the merchant
banker being much more large deal driven and with decided views on
expansion into Europe. His most spectacular operation was of the
management buy-in led by Geoffrey Mulcahy at ailing US controlled
Woolworth which, over the last decade, has emerged as one of the success
stories of British retailing scene as Kingfisher. But the continent
beckoned.
So it is with some great relief to him that Credit Commercial de
France (CCF) and Berliner Handels-und Frankfurter Bank (BHF) have
assumed control and should be able to give Mr Blank the platform he
wants. His refusal to develop Charterhouse into an all-singing, all
dancing securities house after Big Bang avoided many costly mistakes for
which the Royal owes him much thanks. But he was enviously eyeing the
opportunities in Europe where his financial skills in the less
sophisticated markets could prove highly rewarding, helping UK corporate
customers in their expansion.
The terms of the deal are necessarily complicated but in essence, the
Royal is receiving altogether #185m after allowing for a #50m dividend
it took out of the subsidiary last year in expectation of the sale being
concluded. The sum represents a slight premium over the Charterhouse net
asset value of #168m.
Although the Charterhouse Tilney stockbroking side is staying with Mr
Blank, perhaps the most salient point is that the Royal will take over
Charterhouse Development Capital's Scottish business with a #27m
portfolio of unquoted securities. That should provide the Royal with a
ready made base to build up its Scottish corporate business as the Scots
have traditionally preferred one stop banking to a greater extent than
their English counterparts. It should give the branch network greater
exposure to customer opportunities -- Dr Mathewson's career through 3i
and then as chief executive of the Scottish Development Agency partly
explains the focusing of this particular activity.
Also being retained is the Charterhouse Capital Markets operation
which contributed a quarter of the subsidiary's #23m profit last year.
However, there is a negative in that there will be a small dilution in
earnings as the return on the cash inflow with short-term money rates at
6% is less than what the Royal would have received from an on-going 100%
owned Charterhouse. But there should, in a full year, be a small
improvement of just over [1/2]% in the Royal's cost income ratio. So the
Royal's major international expansion will be through its Citizens Bank
in the US and the IBOS money transmission system where CCF is the French
partner -- BHF is a corporate bank with only 20 branches.
But that may well prove a less rewarding long-term than having
retained Charterhouse.
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