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by the EU with the requirement that it be completed by December 2013, following the train of events which arose necessitating significant amounts of UK Government State Aid to Lloyds Banking Group (“LBG”). A group of major investors had concluded in 2010 that the retail banking industry in the UK was essentially a valuable area in which to invest. They had a number of discussions to form a group to finance a new company which, at the time, was intended to be chaired by Sir Brian Pitman, former Chairman of LBG. Sir Brian then died, and I was then approached by this group of investors. Basically, they put a proposition to me that if I were to be prepared to take on the chairmanship of a publicly quoted 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 do everything possible to promote the formation of a “new challenger bank” and consumer champion. I agreed to take on the chairmanship and had the initial task of forming a board of directors for the new company, NBNK Investments (“NBNK”), which was then listed on the Alternative Investment Market. The original group of investors consisted of some of the largest and most respected investment institutions in London. These were: Invesco, Aviva, Moore Capital, Bailey Gifford, Foreign & Colonial, Blackrock and Och Ziff. The board of directors included Sir David Walker, Lord Forsyth, Lord McFall, Lord Brennan and Gary Hoffman, who was appointed as the CEO. The board and our shareholders shared a common belief that the time was right to create a new presence on the UK high street – a UK retail bank which was legacy free and could focus investment 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, but operating 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 the Company with an emphasis on staff training in key areas of any acquired business, to refocus the acquired entity and to recruit the best branch managers and staff to enable decentralisation of customer service and decision making. The new bank would be run to strict standards having robust controls in place across the organisation with high quality and well trained staff throughout. Greater discretion would be delegated to local management to operate controls through the branch network. Normal prudent retail banking methods of risk control, such as credit scoring, would have been retained. This return to a more traditional form 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 who train and position front office staff to operate with a high personal service ethos, combined with 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 that such a model would revolutionise high street banking while still providing a meaningful return on investment. In March 2011, the Chief Executive of LBG, Antonio Horta Osorio, said that the move to sell these branches, which transaction was to be called Verde, would be accelerated. On 11 June 2011, the process letter was published requiring bids to be submitted by 11 July. Moreover the CEO of LBG set a target of “agreeing a deal by the end of 2011”. This was a timetable to which 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 Coop, Neville Richardson, resigned, it being reported in the FT that he was “lukewarm” on the Co-op’s bid and that he did not wish to be tied in to another lengthy integration. Other publications put his reasons for departure more strongly – he was not in favour of the Co-op bidding at all. On 4 August 2011, the round 2 process letter was dispatched requiring a bid to be submitted by 28 September 2011. We duly submitted our bid on that date and we were in fact the only bid that was received. In the weeks that followed, I wrote to the LBG chairman to press the importance of sticking with the original timetable. We believed that it was imperative to the integrity of the process that 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 a statement 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 a revised offer which we did on 4 November. We did so believing, at the time, that our revised offer would be put to LBG’s board on 16 November. The revised asset package was much improved and presented greater scope for profitability and producing stronger and earlier return on equity. One of the enhancements was that LBG had indicated a willingness to invest additional 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 the package on offer and certain macro-economic assumptions), a further, final revised bid should be submitted, which we did on 12 December. This was, to be clear, our third bid under the so called round 2 process. On 14 December 2011, LBG announced that the Co-op had won the competition. 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 reasons that 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 tax payers). See Appendix 2. Following the meeting, LBG confirmed that exclusivity which had been given to the Co-op would be extended to the end of March 2012. On reading this document again in June 2013, I am struck by how prescient it has proved to be and by how much 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 announced the end of the Co-op’s exclusivity. Through May 2012, at LBG’s request, we worked to provide assurances to LBG on three areas of comfort that they sought (on our engagement progress with the FSA, clarification of certain technical aspects of our offer, and on the strength of our shareholder support for a capital raise). We were able to provide satisfactory responses on all points, sharing with LBG certain reassurances we had received from the FSA about our ability to proceed to heads of terms. On capital raising: • We provided comfort letters from all our principal investors at very short notice when requested. • 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 no appetite for such discussions. • On numerous occasions Antonio Lorenzo and Toby Rougier said to Gary Hoffman that they “understood exactly where we were in the fundraising process and could not expect more than 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 plans and self-evidently than an IPO. On 22 June 2012, we submitted a new and final offer to LBG and on 27 June, LBG announced the 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 dependent upon the future profitability of the branches which had been acquired; (b) IT and operations would be provided on commercial terms using LBG’s people and systems. 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 was signed and well in advance of completion; (b) We stated that we would pay at the top of the range if the figures quoted by LBG were confirmed by them. (c) Additionally, we said that there would be a further upward price adjustment of £50m dependent 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 profitability during 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 that we had put forward up to that point. We had in place a strong and experienced
management team, led by Gary Hoffman, and had carried out a lot of work and, incidentally, spent a lot of money on preparing the new intended company to start operations. During the whole of this period, UKFI had been responsible to safeguard the interests of the tax payer in the investments which HMG had made in LBG and the RBS Group. I wrote to the Chairman of UKFI at the end of April 2013 to say that we required a full explanation as to how the decision had been made and, once again, requested an explanation as to why the bid from the Co-op had been accepted. He replied to me on 29 April saying that he had asked that question of the Chairman of LBG, Sir Win Bischoff, who had told him that they didn’t believe there was a significant difference between the two proposals and that NBNK’s proposal was not underwritten. I must say that close examination of the two bids, which I have outlined in this letter, would not lead any reasonable person to that conclusion. Additionally, we had already explained to LBG and they had accepted that, given the names of our shareholders, underwriting at that stage would not be required and we would not need any other form of financing. I therefore replied to Robin Budenberg on 8 May to say that we did not regard this as an acceptable answer and quite coincidentally, just two days later, it was announced that the Co-op had withdrawn from the deal and the finances of the Co-op were then publicly shown to be in very bad shape with its credit rating being severely downgraded to junk status. It seems clear that, from the outset, the Verde asset sale process did not proceed in a satisfactory manner. NBNK was the only bidder successfully to meet the timetable set out by LBG at round 2, so the subsequent extensions in the timetable that led to the inclusion of a round 2 bid by the Co-op leave a number of unanswered questions. In particular: 1. Was the outcome of the public auction of the Verde assets pre-determined?; 2. If it was not pre-determined, was there a bias towards one of the bidders as evidenced by the late inclusion of the Co-op, changes to the asset package for sale, acceptance of a bid that would have given a lower cash outcome to LBG and the tax payer in DCF terms, etc?; 3. Was the process flawed?; 4. Was there a bias on the level of scrutiny of the two bids by LBG?; 5. Was the board of LBG given a dispassionate and properly objective analysis of the difference between the two bids?; 6. To what extent were UKFI and HMT involved in the process, at what point were they consulted and upon what basis did they conclude that the Co-op bid was in the best interests of promoting the Government’s policy (to create a challenger bank) and the public interest (to realise an asset sale on the best commercial terms)?; 7. How can that public interest have been served in the light of the Verde sale costs incurred by LBG, which were reported as £1 billion after tax by Antonio Horta-Osorio at the Parliamentary Commission on 4 February 2013 and more recently by LBG Finance Director George Culmer on 1 May as £1.3 billion before tax with an additional £200m - £300m following the withdrawal of the Co-op? (See Appendix 3 – press report from the Herald Scotland dated 1 May 2013). Concurrent with all the above, we had been over the period receiving a number of messages indicating that there had been significant political involvement leading up to the original
decision. My attention was drawn to a section of the Coalition Agreement indicating the desire to promote the interests of mutuals in the Financial Services Industry. I was therefore advised that the decision was based on an indication from senior politicians within the Coalition that the Co-op deal was to be the preferred and definitive solution.
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