Goldman Sachs, Merrill Lynch and UBS placed £2.5bn of new RBS equity on Wednesday, after the takeover had been announced in New York the previous evening.
The deal faced difficult market conditions, with European indices generally depressed this week, but fortune came to RBS?s aid ? the FTSE 100 gained on Tuesday and Wednesday after falling by 1.8% last week.
Such was the secrecy surrounding the takeover bid and the equity issue to finance it that bankers originally planned to sell the shares over two days.
Bankers working on the deal said that because they knew they would be unable to pre-market the deal to key investors for fear that news of the takeover might leak out, they decided to give themselves two days to sell the jumbo deal.
But strong demand for the stock allowed the leads to close the book on Wednesday afternoon, a day ahead of schedule.
Only Vodafone?s sale of £3.1bn of new shares in May 2001 to fund its purchase of Japan Telecom was a larger accelerated placement.
RBS?s deal has knocked into third place its own £2.1bn issue in July 2001, conducted to fund the purchase of US financial group Mellon.
Despite the size of the transaction, bankers said it was a relatively straightforward sale.
The high take-up by existing shareholders and strong support from the US were two of the key ingredients for the deal?s success, according to equity bankers. The deal closed 1.5 times covered.
?This was one of the most exciting days at work ever,? said a head of ECM at one of the lead managers. ?We had our doubts whether there?d be capacity in the market for the deal, but the response we had in the afternoon from investors quickly put us at ease.?
The 156m new shares were sold at the top of the price range of £16.10 to £16.20, a discount of 5.9% to the stock?s closing price on Tuesday and a tight 0.3% discount to Wednesday?s close. The new shares make up 5.25% of RBS?s share capital and are equivalent to about 12 days? average trading.
RBS?s stock fell 5.6% with the launch of the deal on Wednesday, to close at £16.25, hitting a brief low on the day of £16.199 ? just below the deal?s offer price. Yesterday (Thursday) the share price rallied 1% to £16.419.
?It?s quite a difficult time at the moment in the market, particularly with this size of deal,? said another equity banker. ?We had a good story, though, and an issuer with a reliable track record and a loyal shareholder base.?
That loyalty in fact presented bankers working on the deal with one of their few problems.
Most investors in the bank are already overweight in the stock and were reluctant to increase their weighting in the shares. But institutions generally had faith in RBS?s ability to put the funds to good use ? and there were plenty of new investors to take up any shortfall from existing shareholders.
UK-based accounts were the main buyers of the shares, followed by continental European and US investors.
According to a banker, the US conference call with RBS?s management attracted unprecedented interest, with over 200 investors listening to the call.
RBS?s largest shareholder, Banco Santander Central Hispano, which has a 5% stake, is known to have bought stock in the deal, which bankers said gave the issue a strong vote of confidence.
Merrill Lynch as stabilisation manager has a £250m greenshoe, which is likely to be exercised soon if the share price continues to rally, increasing the deal size to £2.75bn.
?Cash works better?
The stock market has given a positive, if cautious welcome to the acquisition of Charter One Financial by RBS?s US subsidiary Citizens Bank.
RBS considered using its shares to pay for Charter One, but because most of Charter One?s shareholders are US investors unable to hold sterling assets, that would have led to a large flow-back of RBS?s shares into the UK.
One equity syndicate banker said that since the last stock market bubble in 2000, many takeover candidates have preferred to take consideration in cash. ?Cash works better these days,? said the banker.
A straight debt issue was ruled out because of the impact it would have had on RBS?s tier one ratio. After the acquisition the bank?s tier one ratio will remain at about 7%.
?This is not a big event as far as tier one is concerned,? said Fred Goodwin, RBS?s chief executive, in a conference call with European analysts on Wednesday.
A credit analyst covering European banks said the deal was a good one for RBS. ?Charter One fits well with their existing Citizens business,? he said. ?This expansion strategy seems like a carbon copy of Lloyds during the 1980s ? and there is still much more consolidation to happen in the US market.?
The purchase of Charter One makes Citizens Bank the seventh largest bank in the US, with $87bn of deposits and assets of $127bn. In the same conference call, Goodwin said there were ?significant opportunities for future acquisitions in the US?.
However, he would not be drawn on whether RBS?s next acquisition would be in the US or Europe, and whether new equity financing would be used to fund any future acquisitions.
Goodwin noted that the deal should increase the US?s contribution to RBS?s revenues from 19% to 25%. The banking analyst said this was roughly the same ratio RBS had before it bought NatWest Bank in March 2000.
Burning pockets
?RBS seems to be quite a hyperactive bank at the moment,? said the analyst. ?While RBS has a good record on mergers, with roughly 70% to 80% of its mergers successful, compared to an industry average of about 50%, there is a feeling that it has money burning a hole in its pocket.?
Bankers are looking out for other issuers with burning pockets, and are hoping the deal may lead to more high quality issuers entering the equity capital markets to finance M&A transactions.
?This deal definitely shows the equity market is open for these types of transactions,? said an equity banker working on the deal. ?And of course, we hope more issuers will follow.?
