Taoyuan Nights

Ok, this is just for fun – stick with it, and you will see just how crazy the world of finance can seem.

1) Recently, a consortium of banks (Fortis, Santander, and RBS) offered £48 billion to buy ABN Amro.

2) According to the words of RBS’s CEO, Fred Goodwin: RBS has a 38% share of that transaction. In other words, £18.24bn.

3) However, that 38% included a bank within ABN Amro, called La Salle. La Salle has just been sold seperately for £11.5bn.

4) That leaves RBS paying for £6.74bn (18.24bn-11.5bn) for its share of the remaining parts of ABN AMRO, assuming that the business splitup is the same.

5) When RBS first expressed an interest in bidding for ABN Amro, its share price was £6.66.

6) However, RBS’s share price became £5.71 today (and was £5.76 at close of market).

7) RBS has 9,456,444,000 shares outstanding.

8) (6.66-5.71)*9,456,444,000 = almost exactly £9bn.

9) In other words, the market has ‘written off’ £9bn from the equity of RBS as a result of an offer made of £6.76bn, net.

10) Therefore, assuming the remainder of RBS not involved in this transaction is still worth what it was before, new buyers of RBS shares are effectively paying their fraction of -£2.26bn for ABN Amro. So, as a new buyer of RBS you are obtaining your ABN Amro shares for “Cheaper-Than-Free!”.

11) But wait. It gets better.

12) The consortium (Fortis, Santander, RBS) recently altered the offer being made, so that a greater proportion would be paid in cash. I’m going to change to Euros here, for simplicity’s sake.

13) The offer as it currently stands consists of 35.6 Euros (cash) and 0.296 RBS shares, being paid per ABN AMRO share.

14) At the close of market today, ABN’s share price was 35.29 Euros.

15) That means, RBS’s shares are being valued at ‘Cheaper-Than-Free!” too. By buying an ABN AMRO share, you get your money back, plus 0.31 Euros, plus 0.296 RBS shares.

16) The horrifying conclusion.

a. ABN Amro’s shares are being valued at ‘less than nothing’.
b. RBS’s shares are being valued at ‘less than nothing’.
c. If an acquirer whose equity is valued at less than nothing, buys a company whose equity is also valued at less than nothing – is the acquirer’s equity diluted? Or does a black hole open up in the space time continuum and swallow us all?

Further notes

(point 4/9) It turns out, in the revised bid, RBS actually altered the net portion of ABN it wishes to have (in its revised bid) to around £10bn. But still, the market is apparently assuming that the entirety of this investment by RBS will just disappear into thin air… though it’s not quite as bad as I made out in the above argument – yet.

(point 15) Demully (a writer on various UK financial forums) suggests that because there are two bids in the running for ABN, the market price for ABN implies shareholders will pick a lower bid rather than the one from RBS; and also it reflects a risk premium, in that the bid might not go ahead at all. That’s a fair point. However, to my mind, the size of the premium seems… collossal… given that the RBS bid is actually formalised.

(generally) It’s actually unfair to say that all of the fall in RBS’s price can be attributed to the bid they have made for ABN Amro. There has been a mild fall in the market lately; however, comparing against one of RBS’s peers – say, HSBC – we can see that RBS’s share price has changed in a unique and significant way since the bid was announced.

Thanks to demully for some of the above.