After months of speculation about whetheror rather, whenthe Royal Bank of Canada would buy out the other half of its joint venture with Dexia, RBC announced today that it had signed an agreement to buy Dexias 50% stake in global custodian RBC Dexia. RBC will pay 837.5 million for Dexias half, giving RBC full ownership of the business.
The deal, subject to regulatory approval and other closing conditions, is expected to close in mid-2012.
A spokesperson for RBC Dexia says the name of the global custodian will likely change upon completion of the deal to better reflect the new ownership. Upon closing, RBC Dexia will become a wholly owned subsidiary of RBC, he says.
For now, it appears the buyout will not have a material impact on the business or structure of the global custodianmerely its ownership, says Linda Bernard, senior vice president for North America at Thomas Murray. For them, buying out the [other] 50% stake in RBC Dexia is not going to change them as far as delivering the products and services they have been delivering, she says. It just changes the structure of the ownership of the company. From what they have announced, its not going to change how theyre doing anything.
Bernard, who participated in a call this morning about the deal between RBC and analysts, says the deal is good news for clients given RBCs anticipation of earnings growth for the business. RBC says it expects the acquisition to be moderately accretive to earnings by next year, despite a number of short-term losses on the deal that will be recorded in the second quarter this year.
The purchase was not unexpected. In October, Luxembourg Finance Minister Luc Frieden acknowledged that the parent companies in the RBC Dexia joint venture were in discussions about an RBC buyout of Dexias half, which Frieden said at the time was imminent. He said then that RBC planned to exercise its first right of refusal to buy the stake when Dexia put its half of the business up for sale. In November, RBC CEO Gordon Nixon said the bank was examining what our opportunities are in a possible buyout, and in January Dexia CEO Pierre Mariani said he expected a deal to be reached in weeks.
Until the deal was announced today, RBC Dexia declined to comment on a possible RBC takeover of the full business, instead saying it was business as usual at the joint venture.
Dexia was hard hit in the global financial crisis. The Belgian bank has sold off a number of divisions and restructured its remaining business in order to pay off bailout loans it took at the height of the crisis in 2008. Global Custodian featured how Dexias problems could impact RBC Dexia, including the then-hypothetical sale of the Belgian banks stake to RBC or another institution, in The case for RBC Dexia, Fall 2011.
We have developed an in-depth understanding of the global custody business strong fundamentals and opportunities for growth through our long-standing Canadian custody operations and more recently, through the RBC Dexia joint venture, RBCs Nixon said in a statement about the purchase today. The transaction announced today has significant strategic value to us, not only as a standalone business but also in its complementary capabilities to RBC. It is a strong business that generates stable revenue in an attractive sector that is well positioned for long-term growth. It has a premier list of institutional investor clients globally and fits well with our diversification strategy.
As part of the deal, RBC Dexia has sold 1.4 billion of Dexia Group fixed income securities back to Dexia and purchased an equivalent amount of U.S. dollar-denominated securities consisting primarily of notes issued by large, global financial institutions, RBC says. RBC Dexia will incur a loss on the sale, with RBCs share of the loss being approximately $30 million, which will be recorded in the second quarter.
RBC also has had to revalue its investment in the joint venture given its own purchase price of Dexias half. The revaluation will result in a non-cash loss of about $170 million after tax for RBC, which also will be recorded in the second quarter.
In a statement, Jose Placido, CEO of RBC Dexia Investor Services, said: I look forward to the continued support of RBC in realizing our goal of becoming the premier provider of investor services to the world’s leading asset managers and financial institutions. Together, we share the same core values of commitment to excellence in client service, collaboration and integrity. RBC Dexia has a clear vision for the future and has developed a compelling strategic plan in order to accelerate our growth over the next five years, which we will continue to pursue with the commitment of a financially strong and stable owner. Were looking forward to the next stage of our development, but for now it will be business as usual.
RBC says the deal will reduce its Tier 1 capital ratio by about 25 bps. The bank has a Moodys credit rating of Aa1; RBC Dexias is Aa3. RBC Dexia had net income of 123 million in 2011, with a book value of 1.7 billion, according to RBC.
Full ownership of RBC Dexia will allow us to leverage RBCs excellent reputation and financial strength to win additional business and drive growth, Jim Westlake, group head of International Banking and Insurance at RBC, said in the statement. This is a very scalable business with leading infrastructure and processes already in place. It is well positioned to benefit from higher interest rates and an improvement in market asset values.
Goldman Sachs and RBC Capital Markets advised RBC in the deal.
(CG)