The decision to sell Ulster Bank came as no surprise but the move could bring about radical change in the structure of the Irish banking market. Acquiring Ulster Bank would dramatically enhance the operations of a number of the existing players in a market already undergoing profound change, with the imminent sale of ICC Bank to Bank of Ireland and ACC and TSB negotiating a merger.
Irish Life and Permanent has clearly stated its interest. The acquisition would give the operation the market scale and branch structure it wants to build. National Australia Bank, the parent of National Irish Bank, has said it intends to expand in the UK and in the Irish market. Its attempts to buy TSB Bank failed, so it could be a very interested bidder for Ulster and it has the deep pockets required to fund the acquisition.
Through the acquisition of Ulster, either of these potential buyers would become the clear third force in the Irish market after AIB and Bank of Ireland. But the bidding battle will not be limited to these two players. As a strong and profitable operation with an all-Ireland franchise, significant shares in all of its target markets and strong brand loyalty, Ulster should be an attractive target for EU banking operations seeking an operation in the Irish market or EU banks already here. ABN AMRO and Kredietbank of Belgium, the parent of Irish Intercontinental Bank which recently pulled out of the bidding for ICC Bank, could be interested. Any EU bank not already in the Irish market would have to weigh up the need to pay a full price for Ulster and the lack of synergies with an existing operation against possible opportunities to raise profits.
Another possibility is an agreed joint bid by two potential acquirers each interested in different parts of Ulster. NatWest has stressed that it has no plans to break up Ulster Bank by selling the operations in the Republic and Northern Ireland separately.
But this may be just a starting position which may eventually be overruled by the primary target of achieving the maximum price for its shareholders.
Some potential buyers may be interested in just one part of Ulster. Bank of Ireland, for example, is likely to be interested in Ulster's operations in Northern Ireland but could be ruled out of taking over the operations in the Republic by the regulatory authorities on the grounds that it would be anti-competitive. National Australia Bank, which already has significant scale in Northern Ireland, could face similar regulatory problems if it tried to take over the Ulster Bank operations there.
However, the regulatory situation has not yet been tested, with the banks likely to counter any ruling that a take-over was anti-competitive on the grounds that there is no longer any such thing as an Irish banking market. They could argue that the banking business is now a European one where they remain small players. On these grounds, Bank of Ireland and AIB also could bid for the whole Ulster Group.
If this regulatory defence failed, these potential buyers could either decide to make a joint bid with another party interested in the part of the business they would not be allowed to retain, or, they could enter a pre-bid agreement to buy the operations they wanted from the successful bidder. This would also have the effect of immediately releasing some value for the successful bidder, reducing the cost of the deal.
A £2.5 billion price tag looks expensive. It would put the cost on a challenging ratio of just more than 16.5 times prospective earnings and about 3.4 times book values. At £2 billion the ratio would be 13.4 times earnings and 2.7 times book values - closer to the current market ratios of 12 to 13.5 times earnings and 2.8 to 3.2 times book values.
With NatWest running a dual divestment strategy - demerger and flotation or sale - and aiming to move "swiftly but not foolishly", according to executive chairman Sir David Rowland, there will be pressure on interested bidders to come forward quickly with their best offer. The deal is now expected to take three to six months to complete.
