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July 2, 2010
Share ThisOn Thursday, JPMorgan Chase & Co. (JPM) announced the completion of its previously announced deal to buy Royal Bank of Scotland Group plc's (RBS) non-U.S. commodities joint venture RBS-Sempra Commodities LLP. The final acquisition price was $1.6 billion.
The deal, which was announced by JPMorgan in February 2010, received the European Union’s (EU) approval in June 2010. The approval follows the Commission’s careful examination of the operations of both the companies.
According to the Commission's examination, there are limited horizontal overlaps between the operations of JPMorgan and RBS-Sempra. As a result, the deal would not obstruct effective competition in the operating area of the companies in Europe.
In order to comply with the European Union rules, RBS decided to sell its 51% stake in RBS-Sempra, which it jointly owns with Sempra Energy (SRE). The step is also a part of RBS’s restructuring efforts, which include selling non-core businesses in selected markets to shore up its financial resources.
Royal Bank of Scotland received state aid during the height of the financial crisis. As a result, it has to carry on with the interventions of the EU regulator.
The current merger is expected to create an integrated provider of both financial and physical trading services across the major commodity classes. Through this deal, JPMorgan has acquired RBS-Sempra Commodities' global oil, global metals, global coal, and European natural gas and power businesses.
However, the deal excludes RBS-Sempra’s most valuable North American operations, which account for 64% of its trading revenue. However, active efforts are in progress for the sale of the remaining North American operations of RBS-Sempra.
Out of the total proceeds from the deal, Sempra Energy is expected to receive approximately $1 billion.
Incorporated in 2008, RBS-Sempra trades commodities ranging from oil and natural gas to metals and agricultural products. Royal Bank of Scotland, one of the major victims of the global financial crisis, is at present 83% owned by British taxpayers. The bank's woes stem from risky investments in areas such as commercial-property loans, leveraged finance and derivatives. The bad assets inherited with the acquisition of a part of the Dutch bank − ABN Amro Holding NV − in 2007 have compounded the problem.
We view the RBS-Sempra deal as positive for JPMorgan as its strong capital position should enable it to easily manage the business.
While we anticipate continued synergies from the company’s diversification and strong capital position, stressed credit quality and reduced levels of client activity will drag future earnings. However, we are impressed to see some improvement in credit quality in the last couple of quarters. As such, we have a Neutral stance on the shares of JPMorgan.
Read the full analyst report on "JPM"
Read the full analyst report on "RBS"
Read the full analyst report on "SRE"
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