Britain's Royal Bank of Scotland is considering a major acquisition in the United States early next year, according to a report in The Scotsman newspaper on Wednesday. The plan is reportedly code-named Project S and details remain sketchy at best. The bank denied the report, which used anonymous sources.
The news that RBS's U.S. unit Citizens may be seeking a big deal in the New Year comes as no surprise. RBS built Citizens through acquisitions both big and small, so doing a deal would be a natural. In addition, a Reuters report about the news quotes Citizens CEO Larry Fish as saying the bank will continue to make up to two small purchases a year to flesh out its network. However, RBS's definition of a major deal differs greatly from the small deals Citizens has regularly been pursuing because RBS considers any deal that is 5% or more of the bank's £9.2 billion ($18 billion) profits as a major acquisition, according to The Scotsman's sources. Most of Citizens deals of late have been less than RBS's target price.
Currently, Citizens operates in New England, the mid-Atlantic and the Great Lakes region of the Midwest. However, the operations are somewhat fractured along the East Coast with no branches between New England and Philadelphia. Therefore, logic would dictate that the hole in New York and northern New Jersey would lead Citizens to buy a bank in that region.
However, The Scotsman report suggests it is possible that RBS may look beyond its core U.S. markets and expand elsewhere in the country. If the Project S title has any meaning, perhaps Citizens is looking to the U.S. Southeast, especially Florida. As Baby Boomers from cold-weather states follow their parents lead and flock to Florida for retirement, a deal in the Sunshine State would make the most sense because the move would allow customers who banked with Citizens in the north to continue banking with it in Florida. This logic has led smaller peer Cherry Hill, N.J.-based Commerce Bancorp to open branches in Florida's Palm Beach County, a popular retirement destination for New Jerseyans.
Perhaps Commerce is the most logical target for RBS because it would fill its hole in the New York City area, remove a mid-Atlantic competitor and also add a beachead in South Florida. Plus, Commerce's $6.76 billion market cap would indeed make it a major acquisition.
Alternatively, The Scotsman suggests RBS may expand beyond commercial banking in the U.S. specifically mentioning electronic clearing as a likely alternative. Again, based on the clues, another buyout candidate could be State Street Corp., who is already believed to be in play following the planned merger of rivals Bank of New York Co. and Mellon Financial Corp. In addition, State Street's Boston headquarters is practically a stones through away from Citizens' Providence, R.I. HQ making for a convenient integration opportunity. State Street's market cap is $22 billion.
Another candidate that could fill multiple roles is PNC Financial Services Group Inc., whose $21.5 billion market cap would easily fit into RBS's definition of a major deal. Plus, PNC's commercial banking operations and trust operations make it a better value for RBS, than State Street.
Regardless, The Scotsman indicates a deal is likely to be done in the first quarter of 2007, so we may not have to wait long to see who RBS takes out. —Matthew Wurtzel
See story from The Scotsman
See story from Reuters
See Banking Dealwatch
See related post from Dealscape
Continue reading below
