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Lord Levene evidence to Treasury Committee

Lord Levene evidence to Treasury Committee

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Published by politicshomeuk
Lord Levene's written evidence to the Treasury Committee on Lloyds Bank's 'Project Verde'.
Lord Levene's written evidence to the Treasury Committee on Lloyds Bank's 'Project Verde'.

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Published by: politicshomeuk on Jun 18, 2013
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Written Evidence Submitted by Lord LeveneRESUME OF NBNK BID FOR PROJECT VERDEThe sale was mandated by the EU with the requirement that it be completed by December2013, following the train of events which arose necessitating significant amounts of UKGovernment State Aid to Lloyds Banking Group (“LBG”).A group of major investors had concluded in 2010 that the retail banking industry in the UKwas essentially a valuable area in which to invest. They had a number of discussions to form agroup to finance a new company which, at the time, was intended to be chaired by Sir BrianPitman, former Chairman of LBG.Sir Brian then died, and I was then approached by this group of investors. Basically, they puta proposition to me that if I were to be prepared to take on the chairmanship of a publiclyquoted bid vehicle with the announced intention of buying these 632 Lloyds Bank branches,they would provide adequate financial backing to finance the acquisition and to create a“new challenger bank”.It was an important plank of the policy of the Coalition at its outset, that it would doeverything possible to promote the formation of a “new challenger bank” and consumerchampion.I agreed to take on the chairmanship and had the initial task of forming a board of directorsfor the new company, NBNK Investments (“NBNK”), which was then listed on the AlternativeInvestment Market. The original group of investors consisted of some of the largest and mostrespected investment institutions in London. These were: Invesco, Aviva, Moore Capital, BaileyGifford, Foreign & Colonial, Blackrock and Och Ziff. The board of directors included Sir DavidWalker, Lord Forsyth, Lord McFall, Lord Brennan and Gary Hoffman, who was appointed asthe CEO.The board and our shareholders shared a common belief that the time was right to create anew presence on the UK high street – a UK retail bank which was legacy free and could focusinvestment in UK retail and SME banking and savings. Our objectives were clear.We intended to be a modern banking operation with internet and telephone services, butoperating on the basis of a return to a traditional, branch based, personalised, local service.The new bank would be managed in a conservative manner in respect of key financial ratios.Strong customer focus and prudent financial management would reflect the ethos of theCompany with an emphasis on staff training in key areas of any acquired business, to refocusthe acquired entity and to recruit the best branch managers and staff to enabledecentralisation of customer service and decision making. The new bank would be run to strictstandards having robust controls in place across the organisation with high quality and welltrained staff throughout. Greater discretion would be delegated to local management tooperate controls through the branch network. Normal prudent retail banking methods of riskcontrol, such as credit scoring, would have been retained. This return to a more traditionalform of branch banking, where retail and SME customers could get access to a full range of banking products and advice would – we believe – have been widely welcomed. The return
of locally empowered management, who know and are known by their customers, and whotrain and position front office staff to operate with a high personal service ethos, combinedwith telephone and internet banking for those customers who preferred it, were (and are)aspirations shared by many – including our investors, who were (and remain) convinced thatsuch a model would revolutionise high street banking while still providing a meaningful returnon investment.In March 2011, the Chief Executive of LBG, Antonio Horta Osorio, said that the move to sellthese branches, which transaction was to be called Verde, would be accelerated. On 11 June2011, the process letter was published requiring bids to be submitted by 11 July. Moreover theCEO of LBG set a target of “agreeing a deal by the end of 2011”. This was a timetable towhich we and our investors were committed.On 11 July 2011, NBNK submitted its round 1 bid. On 23 July 2011, the Chief Executive of the Co-op, Neville Richardson, resigned, it being reported in the FT that he was “lukewarm” on theCo-op’s bid and that he did not wish to be tied in to another lengthy integration. Otherpublications put his reasons for departure more strongly – he was not in favour of the Co-opbidding at all. On 4 August 2011, the round 2 process letter was dispatched requiring a bid tobe submitted by 28 September 2011. We duly submitted our bid on that date and we were infact the only bid that was received.In the weeks that followed, I wrote to the LBG chairman to press the importance of stickingwith the original timetable. We believed that it was imperative to the integrity of the processthat it should be fair and managed in line with the rules that LBG had itself prescribed.Despite this, no further progress was made with LBG and on 4 November the Co-op made astatement that they were going to submit a round 2 bid.Around this time, LBG signaled that revisions were being made to the package for sale,presumably to induce the Co-operative to submit a bid, and invited NBNK to submit arevised offer which we did on 4 November. We did so believing, at the time, that our revisedoffer would be put to LBG’s board on 16 November. The revised asset package was muchimproved and presented greater scope for profitability and producing stronger and earlierreturn on equity. One of the enhancements was that LBG had indicated a willingness to investadditional Core Tier 2 capital, which made the overall package more attractive to bidders.LBG then indicated that, since key variables had again changed (including the terms of thepackage on offer and certain macro-economic assumptions), a further, final revised bid shouldbe submitted, which we did on 12 December. This was, to be clear, our third bid under the socalled round 2 process. On 14 December 2011, LBG announced that the Co-op had won thecompetition.On 27 January 2012, we met with LBG and among other things, presented a document called‘Key risks to the Co-op and Verde transaction’ in which we set out in some detail the reasonsthat we believed meant there was a significant risk that the Co-op acquisition would fail(including highlighting that the price of failure would be significant for LBG and UK taxpayers). See Appendix 2. Following the meeting, LBG confirmed that exclusivity which hadbeen given to the Co-op would be extended to the end of March 2012. On reading thisdocument again in June 2013, I am struck by how prescient it has proved to be and by howmuch might have been saved if the Board of LBG had read it and acted differently.
On 28 March 2012 we submitted a new unsolicited offer and on 27 April 2012, LBG announcedthe end of the Co-op’s exclusivity. Through May 2012, at LBG’s request, we worked to provideassurances to LBG on three areas of comfort that they sought (on our engagement progresswith the FSA, clarification of certain technical aspects of our offer, and on the strength of ourshareholder support for a capital raise). We were able to provide satisfactory responses on allpoints, sharing with LBG certain reassurances we had received from the FSA about our abilityto proceed to heads of terms. On capital raising:
We provided comfort letters from all our principal investors at very short notice whenrequested.
We offered in writing and verbally for LBG management to meet with our investors(our investors having agreed to such meetings) but this offer was not taken up.
We explored with LBG methods of delivering even more certainty. But LBG had noappetite for such discussions.
On numerous occasions Antonio Lorenzo and Toby Rougier said to Gary Hoffman thatthey “understood exactly where we were in the fundraising process and could not expect morethan we were providing them with at the stage we were at”.As it transpires NBNK were clearly a lot further forward than the Co-op’s fundraising plansand self-evidently than an IPO.On 22 June 2012, we submitted a new and final offer to LBG and on 27 June, LBG announcedthe Co-op was to be the preferred and exclusive bidder.It is important at this juncture to compare the offers made by the Co-op and by ourselves(NBNK). The features of the Co-op bid were as follows:(a)
£350m up front with a further £400m in real terms over a 15 year period dependentupon the future profitability of the branches which had been acquired;(b)
IT and operations would be provided on commercial terms using LBG’s people andsystems.There was no indication, at that stage, that the FSA were content with the Co-op offer.By comparison, our offer was as follows:(a)
£630m-£730m in cash paid in escrow as soon as the sale and purchase agreement wassigned and well in advance of completion;(b)
We stated that we would pay at the top of the range if the figures quoted by LBGwere confirmed by them.(c)
Additionally, we said that there would be a further upward price adjustment of £50mdependent on a number of items that might be included in the package.(d)
We also offered to discuss a further upside for LBG depending on future profitabilityduring heads of terms negotiations.(e)
We undertook to guarantee no redundancies. The Co-op refused to do that.At this stage, we had been advised by the FSA that they were content with the proposals thatwe had put forward up to that point. We had in place a strong and experienced

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