Our instinctive reaction to deputy prime minister Nick Clegg’s brainwave to give every British voter shares in the state-owned banks Lloyds Banking Group and RBS is that it’s an ill-thought out populist move that would be a logistical nightmare to execute.
We aren’t talking hundreds of millions shares being given to taxpayers, but billions.
However, the idea might be better than we thought and — given the lack of alternatives on offer — certainly seems worth investigating.
The proposal, which has been put together by Michael O’Connor of Portman Capital Partners, has four components:
- a £5bn convertible bond,
- a £10bn institutional placement,
- a distribution to the public of 95 per cent of the remaining shares and
- a final sale of the residual holding.
Still with us? Here, via the banks team at Credit Suisse, is how the distribution might happen:
In terms of how the public distribution works, effectively each person receives an undated warrant potentially struck at the government entry price. If the shares are above the strike price, when they sell they receive the premium, and the government receives the balance, paying down the government’s borrowing.
The plan envisions the public distribution happening when the shares are trading at a 15% premium to the strike price. We would note that this is untested in the UK, and that the UK doesn’t have the same ‘equity’ culture as the US. Furthermore this plan is also dependent on the shares being worth considerably more than current market prices, note we have 2012E SoP based target prices of 42p and 55p for RBS and Lloyds respectively, both below the potential strike prices in the plan. In terms of the government’s participation in the upside, this would potentially be via taxation of profits realised by individuals sales.
Quite neat, huh?
The government gets cash to reduce the deficit and the public get a potential windfall that can be taxed. The downside, of course, is that the government would give up any theoretical upside. And if the FTSE, for example, changed the free float weighting of Lloyds and RBS to reflect the warrants there could be increased demand for the shares from tracker funds.
Obviously, there would be significant execution hurdles to overcome — the UK doesn’t have the best track record when it comes to large IT contracts (although the Olympics ticketing system did work) — and as Credit Suisse notes, the UK has a limited stock ownership compared to the US.
However, the biggest problem is that it depends on the performance of RBS and Lloyds.
At the moment both are below the government’s average in price, which taking into financing costs will be 54.7 pence and 80p by next year, according to Credit Suisse.
But the idea certainly has merit.
Updates to follow.
Thoughts on Clegg’s proposals to give away bank shares – Westminster blog