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A BARGAIN AT RBS?

FUNDRAISING: Goodwin seeks a cash injection

Wednesday April 23,2008

SHAREHOLDERS have a difficult call to make in bank’s share issue, says HOLLY THOMAS...

Royal Bank of Scotland shareholders are faced with a decision on what to do with their holdings after plans announced yesterday for a £12billion rights issue.

Under the terms of the deal, 11 new shares will be issued for every existing 18 shares, at a price of 200p each.

This means investors are given the option to increase their holding at a reduced price — last night RBS shares closed at 358p. As a result of the credit crunch, RBS, led by Sir Fred Goodwin, as well as other leading banks, is struggling with cashflow after years of lending large amounts and the the value of mortgage-backed assets dropping.

The rights issue means that for every 18 shares owned, RBS will get £22 so the company hopes to raise enough capital to allow the bank to continue its operations as normal. The rights issue is expected to be given the green light in May but it is never too early to start planning, said Richard Hunter at Hargreaves Lansdown stockbrokers.

“Shareholders have several options,” he said. “You can take up the rights and purchase extra shares but only if you can afford it. Although it’s a good opportunity to buy shares at a knockdown price, you still need to make sure you have the cash, and you still have a diversified portfolio.”

Investors can sell the rights, which would, however, lead to a dilution of the shareholding.

If you do not take up the rights issue, the bank will compensate you for the dilution of the value of your holding.

The deal will work as follows. Assuming an RBS share price of 370p and that a shareholder has 1,800 shares — at a current value of £6,660 — the holder will be eligible to take up 1,100 new shares at a total cost of £2,200.

If they choose to accept the offer, they would then hold 2,900 shares valued overall at £8,860. Each share would be carrying a valuation of 305.5p.

So although after the rights issues the shares are worth slightly less, the investor owns more of them. Shareholders will receive written confirmation of their options when the plans are finalised.

Bank of England governor Mervyn King said more banks were likely to follow RBS and make cash calls.

Barclays and HBOS are seen as the likeliest to follow RBS, with Alliance & Leicester and Bradford & Bingley also thought to need to strengthen their balance sheets.