Co-op for sale – Private equity to the rescue?


February 14, 2017

The Co-operative Bank has started its final effort to salvage its future, as it announced it is up for sale on Monday. The bank made the announcement after a warning on its capital reserves. Private equity firms have already announced interest, but other challengers remain in the way of a straight up sale.


The Financial Times reported that institutional investors have suffered heavy losses after injecting almost £2bn into the bank in 2013 and 2014. Co-op has been making a loss and last month, the ethically focused bank announced it continues to struggle with capital problems. Its reserves are expected to fall short in future years, mainly due to low interest rates and the higher-than-expected cost of restructuring.


The final push for a turnaround


The bank is looking at the sale as the final opportunity for a turnaround. It comes after a string of other measures, which started in 2013. At the time, a group of US hedge funds came to its rescue. The bank’s initial public offering plans have been disrupted by charges of miss-sold payment protection insurance and the cost of upgrading its out-of-date IT systems.


The bank’s total lending stood at £19.6bn, with deposits worth £22bn, at the end of June 2016. Its current account customer numbers were around 1.4 million. Fitch Ratings has said that even though the bank has enough cash and liquidity to repay its September Bonds, the capital position is deteriorating, making it harder for the company to access funding in the future.


Therefore, Co-op is looking to sell all of the business rather than offload individual portfolios. The sale process has been handed over to Bank of America Merrill Lynch and UBS.


Private equity buyout or something else?


The future buyer of the company remains unclear. A number of options are currently mentioned in relation to the story, including private equity firms. Bloomberg reported on one analyst, Rick Mattila from MUFG, telling its clients that, “we don’t see the Co-Op bank’s business as being particularly attractive for other banks given its specificities of being a cooperative bank”. Mattila went on to write a private equity investor would be more likely to see an upside in the medium to long-term future. The Times mentioned private equity firm Cerberus in its speculation of a future buyer.


However, a number of so-called challenger banks remain on the cards. The Financial Times reported Andy Golding, chief executive of OneSavings Bank, stating his bank would “certainly look” at suitable portfolios. TSB has also been connected to a possible buyout. Co-op is not the only UK-based bank looking for a sale, which could influence the number of interested buyers. Royal Bank of Scotland Group Plc. is currently looking for a buyer to its Williams & Glyn consumer bank.


Co-op has not ruled out other forms of raising equity. The bank said in the statement that it could still build capital by attracting new investors or by restructuring outstanding debt. The future of the bank remains open and a quick sale might not be on the cards.

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