RBS Sempra Commodities For Sale – But At What Price?

Posted by Eli Magid in Trading and Capital Markets on Dec 9th, 2009 | Comments

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Author: Eli Magid (17 Articles)

Eli currently works in business development and strategic planning for Israel Corp. Prior to joining Israel Corp., Eli held capital markets and corporate finance positions at Credit Suisse and Morgan Stanley. In addition, he is a former financial markets entrepreneur and co-founder of a green carbon finance start-up. Eli has a BSc in Applied Economics & Management from Cornell University.

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The Wall Street Journal reported before the opening bell today that commodities trading venture RBS Sempra is on the selling block and that the vultures are hungrily hovering. More than 20 banks and non-financial companies have expressed an interest in a possible bid including JPMorgan, Barclays, Morgan Stanley and Société Générale. Several large oil companies are reportedly also considering tossing their hats into the ring.

RBS Sempra Commodities is the joint venture formed between the Royal Bank of Scotland and San Diego’s Sempra Energy, in April 2008. Sempra Energy is parent of two sizeable US utilities: San Diego Gas & Electric and Southern California Gas Co.

The prospective sale is driven by the European Commission’s order for RBS to divest itself of certain assets and businesses after an EU-agreed restructuring plan that included a £25.5 billion capital injection. Read that as “UK tax payer bail-out” since RBS is now 70% owned by the UK government.

It was initially thought that Sempra Energy would buy out RBS’s 51% stake, but RBS and Sempra have hired boutique investment bank Lazard Ltd. to handle the sale of the what appears to be the entire venture. The initial equity investment in RBS Sempra Commodities was $1.7 billion and Sempra Energy’s initial investment was $1.6 billion. The JV was originally orchestrated to provide Sempra Commodities with a strong balance sheet and increased financing, and to give RBS the access to the energy and metals trading markets it had long sought.

It’s no surprise this commodities platform is particularly in high demand. RBS Sempra is part of troubled RBS’s very profitable wholesale banking arm, Global Banking and Markets, which accounted for £4.9 billion ($8.06 billion) in profit in the first half of 2009. It’s also one of the more profitable units for Sempra, accounting for $75 million of Sempra’s $198 million in second-quarter earnings.

As a former I-Banker, what will be interesting to watch is how Lazard will value RBS Sempra. After all, it’s not like you can run your standard DCF, comparable multiples and precedent transaction premiums in an effort to value a trading platform.

The price tag could fluctuate depending on how its mark-to-market trading positions are valued and how much financing RBS puts into the venture. But of course, the real value is unquantifiable and unknowable: RBS Sempra’s human capital. Primarily, how many high-quality traders are committed to staying once their company trades hands and the dust settles?

A brief case study: My former employer, Credit Suisse’s, $14 billion acquisition of DLJ in 2000. DLJ which hadn’t even had a formal M&A group until 1994, generated M&A fees of $1 billion in 1999. The price CSFB paid suggested that revenues quickly built up over the years represented a solid and secure franchise from which to grow. What happened? The free-wheeling entrepreneurial and transactional culture DLJ cultivated ensured that once their employees cashed out, the most talented bolted for the next attractive opportunity selling themselves to the highest bidder.

Even more interesting than the valuation will be seeing whether history is destined to repeat itself.