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U.K. Taxpayers See $95 Million Profit on Lloyds Sale

September 17, 2013

U.K. Taxpayer Sees $95 Million Profit on First Lloyds Stake Sale

Chancellor of the Exchequer George Osborne, constrained by the biggest austerity program since World War II, could use the proceeds to fund tax cuts or more spending before the next general election, due in 2015. Photographer: Matthew Lloyd/Bloomberg

The U.K. government made about 60 million pounds ($95 million) in profit on a first sale of its stake in Lloyds Banking Group Plc (LLOY), in a move toward full private ownership of Britain’s largest mortgage lender.

UK Financial Investments Ltd., which oversees the government stake, sold 4.28 billion shares for 3.2 billion pounds, or about 6 percent of the company’s issued stock, the London-based body said in a statement today. The shares were priced at 75 pence, a 3.1 percent discount to yesterday’s closing price and above the 73.6 pence the U.K. originally paid after providing a 20 billion-pound bailout in 2008.

Chancellor of the Exchequer George Osborne, constrained by the biggest austerity program since World War II, could use the proceeds to fund tax cuts or more spending before the next general election, due in 2015. He has said Royal Bank of Scotland Group Plc, which received a 45.5 billion-pound rescue, is still burdened by too many poor assets to be sold.

“Five years ago, the previous government used taxpayers’ money to bail out the banks and I’ve been absolutely determined to get that money back for taxpayers so we can pay down debts,” Osborne said in an e-mailed statement. The stake sale “is another step in the long journey to repair what went so badly wrong in the British economy.”

The shares, which have gained about 56 percent this year, fell 3.5 percent to 74.65 pence in London today. The transaction will reduce the government’s stake in Lloyds to 32.7 percent from 38.7 percent.

Fiscal Profit

The shares were being offered to investors in a price range of 75 pence to 76 pence, said two people with knowledge of the matter who asked not to be identified.

The biggest block of buyers were U.K. based, with an overall majority coming from Britain and the U.S., said a person with knowledge of the sale who asked not to be identified because the information hasn’t been disclosed. The sale was about 3 times over-subscribed, the person said.

The Treasury said it had booked a 586 million-pound fiscal profit on the sale and would use those proceeds to reduce national debt. That’s the difference between the 75 pence sale price and 61 pence at which the government said it would break even on its investment once fees had been taken into account.

Lloyds will be the largest accelerated sale of secondary shares since a 3.5-billion pound transaction in Barclays Plc (BARC) in June 2009, according to data compiled by Bloomberg. Volumes of the sales doubled to nearly $67 billion this year, the data show.

‘Virtuous Circle’

“The sale is a first step of triggering a virtuous circle,” analysts at Jefferies International including Joseph Dickerson with a hold recommendation on Lloyds shares said in an e-mailed note. “The simple manner in which the shares were placed will no doubt be welcomed by investors.”

JPMorgan Chase & Co. (JPM:US), Bank of America (BAC:US) Corp. and UBS AG are managing the offering while Lazard Ltd. (LAZ:US) is acting as capital-markets adviser, according to a statement from UKFI. The government still owns 81 percent of Edinburgh-based RBS. (RBS)

UKFI and the Treasury, or HMT, have agreed not to sell any more Lloyds shares for 90 days without the written consent of a majority of sale managers, according to the statement.

Sale ’Success’

“The size of the 6 percent stake that has been sold is smaller than we had anticipated,” Andrew Coombs and Ronit Ghose, London-based analysts at Citigroup Inc. with a neutral rating on Lloyds, wrote in a note to clients. The “focus has instead been on making sure the sell-down of the first tranche can be deemed a success. In this way the HMT is likely to attempt to bolster confidence ahead of future share placings.”

The Lloyds sale is the government’s biggest since the financial crisis erupted. The Treasury returned part of Northern Rock Plc, the first British lender to suffer a run in 150 years, to private hands in November 2011, selling a portion of the lender to Virgin Money Holdings U.K. Ltd. for an initial 747 million pounds. The U.K. sold 400 million pounds of consumer loans issued by Northern Rock in July and still owns the remainder of the bank and Bradford & Bingley.

In July, the government hired JPMorgan to advise on a strategy for returning both Lloyds and RBS to private investors. It also shortlisted 11 banks as potential bookrunners for a stock offering.

Lloyds Dividend

The following month, Chief Executive Officer Antonio Horta-Osorio said Lloyds was ready for a government sale after it swung into profit in the first half after three years of losses and said it will start talks with regulators about resuming dividends. Lloyds last paid a cash dividend in 2008, before its takeover of HBOS Plc forced it to seek external aid.

The bank posted a first-half profit of 1.56 billion pounds as impairments for souring loans fell. Lloyds, Britain’s biggest mortgage lender, has been buoyed by the country’s economic recovery and rising home prices. A U.K. house-price gauge rose to the highest in almost seven years in August, according to the Royal Institution of Chartered Surveyors.

Adding to signs of recovery, U.K. unemployment unexpectedly fell in the three months through July and jobless claims dropped 32,600 in August, more than economists forecast. The economy grew at the fastest rate in more than three years in the three months through August, according to an estimate from the National Institute of Economic and Social Research.

The government is selling its stake after President Barack Obama postponed an attack on Syria following a diplomatic plan proposed by Russia. Escalating tensions over Syria could have delayed the sale, three people with knowledge of the discussions said earlier this month.

The Treasury this month also started the sale of a majority stake in Royal Mail Group Ltd., the 360-year-old postal service. Barclays Plc, Britain’s second-largest bank by assets, is seeking to raise 5.8 billion pounds in a rights offering this month to help boost its capital buffer.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Ruth David in London at rdavid9@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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