As part of its much larger restructuring with British and European Commission (EC) financial authorities, the Royal Bank of Scotland (RBS) confirmed last Tuesday that it will be divesting its interest in the fifth largest North American energy trading organization, RBS Sempra Commodities. Initial reports that this move was imminent surfaced out of the United Kingdom (UK) last Monday, and San Diego-based Sempra Energy issued a statement to clarify that any breakup would be orderly and could take several years.
RBS offered more clarification on its overall strategic restructuring plans on a conference call to talk about third quarter results.
Driving the breakup of the RBS Sempra joint venture, which has been highly profitable since its beginning in April last year, is the UK-based bank's need to enter into an Asset Protection Scheme (APS) related to bailouts it is receiving from the British government and EC. RBS is in the midst of a strategic plan to recover from the global credit crunch that hit the banking industry late last year.
"To comply with EC state aid requirements, RBS has agreed, in principle and subject to [other approvals], a series of restructuring measures to be implemented over a four year period. These will supplement the measures in the [bank's] strategic plan already announced by RBS," the bank said in an announcement last Tuesday, specifically listing the trading breakup among the steps it will take: "RBS to divest RBS Insurance, Global Merchant Services and RBS's interest in RBS Sempra Commodities, all of which occupy leading positions in their markets."
It went on to list its specific businesses impacted by its EC state aid as: "[The commodities joint venture] is a leading global commodities trader. It provides liquidity and is a partner for several of the world's largest producers and consumers of energy, metals and other commodities.
"RBS Sempra Commodities offers trading, market making and risk management solutions to its extensive customer network. It is the fifth largest energy trading company in North America."
A San Diego-based Sempra spokesperson told NGI last Wednesday the company had nothing to add to its earlier statement on the situation, but it is assumed that Sempra's senior management will have more to say when it holds its third quarter financial results conference call with analysts Monday (Nov. 9).
Last Monday Sempra CEO Donald Felsinger confirmed the possibility of the divestiture and clarified that the RBS-Sempra joint venture agreement "requires that RBS maintain its ownership of the joint venture through April 2012." Felsinger said he understood that any divestiture order from the EC would "allow for an orderly transition, comply with our joint venture agreement, and be executed in a manner that would maximize the value of the business."
Last March in the midst of the shakeout in the credit markets and financial sector worldwide, Sempra's senior executives said the joint venture remained profitable, and at worst Sempra would take back its $1.6 billion investment and look for another partner with global heft if the RBS partnership cratered. At the time Sempra CFO Mark Snell said the joint venture agreement calls for an initial four-year period in which neither side unilaterally can leave the partnership. Sempra has $1.6 billion invested, and RBS was looked to for additional capital in the years ahead. The joint venture marked its first anniversary last April.
With respect to the EC, RBS said last Monday that negotiations between Britain's Treasury and the EC "are in their final stages and will include some divestments not initially contemplated. It remains RBS's goal that any required divestments do not threaten its recovery plan, which is already under way."
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