View the article online at http://citywire.co.uk/money/article/a584706
RBS to beautify itself with 10-for-one stock split
RBS claims its lowly share price is unbecoming of a company of its size, so is proposing a complex and cosmetic 10-for-one share swap.
Royal Bank of Scotland (RBS.L) dislikes its regular presence in the ‘fastest moving shares’ tables so much it is proposing a complicated swap transaction to drastically reduce the number of its shares in the market.
In a letter to shareholders the state-owned bank complained that its lowly share price of 23.3p exaggerated the stock’s volatility in that small movements in price generated big percentage gains or losses.
Rather than rely on the bank’s lengthy rehabilitation under chief executive Stephen Hester, however, RBS wants to drive up its share price with a 10-for-one ‘reverse stock split’.
The purely cosmetic move will see the bank undertake a two-stage process. First it will divide its ordinary shares of 25p into one ‘intermediate’ share of 10p and a ‘deferred’ share of 15p. The intermediate shares will then be immediately consolidated, so that for every 10 intermediate shares investors will receive one share of £1. The deferred shares will then be surrendered and cancelled.
RBS says each ordinary shareholder’s ‘proportionate’ interest in its capital will remain unchanged, although the nominal value of the shares will go up.
At the time of writing the transaction would have generated a new share price of £2.34, a level RBS investors have not seen since 2008. RBS claims the higher, less volatile share price would enable a ‘more consistent valuation of the company’.
Although manipulating the share price will not by itself help taxpayers recoup the cost of the RBS bailout, it could smooth the way for a re-privatisation later this year.
Last month it was reported that UKFI, which manages the government’s 82% stake in RBS, was in talks with investors from Abu Dhabi.
A European Union block on RBS paying dividends expires at the end of this month. However, analysts said the proposed share changes would not hasten the shareholder payments as the bank has first to resume payments to its preference shareholders and then make a profit. The bank lost nearly £2 billion last year, and has seen its share price slide 44% in the past 12 months.
In a note to investors Shore Capital maintained its ‘hold’ stance but said: ‘In our opinion, a share consolidation should have no impact on the fundamental valuation of the company. Furthermore, dividend payments should be based on the ability of the company to afford them, not on the number of shares in issue. We currently assume RBS makes no dividend payment to ordinary shareholders until 2014 at the very earliest.’
Shareholders will be asked to approve the changes at the bank's annual general meeting in Edinburgh on 30 May.
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