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RBS Sempra Trading JV Nears Sale

While the two partners stayed mum, active solicitation of potential buyers by investment bank Lazard Ltd. has stirred speculation that an announcement is coming soon on the European Commission-mandated sale of the Royal Bank of Scotland's (RBS) 51% stake in a joint venture commodities trading operation with San Diego-based Sempra Energy. The U.S. energy holding company has made clear that it wants to remain in the highly lucrative trading space.

A San Diego-based Sempra spokesperson reiterated that the company will not comment on pending deals and referred inquiries to the company's Nov. 9 third quarter earnings conference call replay. During that call Sempra CEO Donald Felsinger unequivocally said whether it takes on new partners -- whose selection it can veto -- or buys back the bank's share of Connecticut-based RBS Sempra Commodities, Sempra intends to stay in the energy trading space, as well as other commodity trading, although it could sell off pieces of the business.

With the success of the trading joint venture, officials in Sempra and on Wall Street have said they expected robust interest in the bank's share. A number of Wall Street firms, including J.P. Morgan Chase & Co., Barclays plc, Morgan Stanley and Societe Generale, were named as possible bidders in a Wall Street Journal report on the impending sale. None of those Wall Street titans, however, would comment on the report.

Speculation is that the sales price is looming in excess of $3 billion; RBS originally paid $1.7 billion for its majority interest in the joint venture in April 2008.

"It is a business we know and understand, it is highly profitable, and we are committed to stay in it longer term," Felsinger said during the earnings call in November, and when pressed for more details he called the commodities trading unit a "valuable franchise," and in the negotiations for replacing the bank "everything is on the table."

The need for RBS to pull out of the joint venture was prompted in early November as part of its much larger restructuring with British and European Commission (EC) financial authorities. Initial reports that this move was imminent surfaced out of the United Kingdom (UK) early last month, and Sempra issued a statement at that time to try to insure investors that any breakup would be orderly and could take several years. Felsinger has continued with that mantra.

At the time Sempra was conducting its quarterly earnings conference call RBS offered more clarification on its overall strategic restructuring plans in a separate 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."

When asked Nov. 9 if there were many firms available now with sound enough credit ratings to replace the bank in the joint venture, Felsinger said the first week's initial interest from potential new partners was "amazing" both in terms of the numbers and quality of firms demonstrating their interest.

RBS Sempra tied for sixth in NGI's 3Q2009 Top North American Gas Marketers Ranking, reporting 6.51 Bcf/d, down 13% from 7.50 Bcf/d in 3Q2008 (see related story).

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