TSB - to Buy or Not to Buy that is the Question?

Click image for more on the share sale.

Lloyds Banking Group has announced the IPO for its sale of the first 25%  tranche of shares in TSB Banking Group which it has been forced to dispose of by the EU on competition grounds. Now as I mentioned before when I wrote briefly about not liking the Saga offer (now at a discount) - I do not normally go for New Issues unless they are priced to go. This is because normally they are being done because it is a good time in the market or for the business itself to sell. In addition the manager and owners, often Venture Capitalists, will have a much better idea of what is going on and the true value of the business - so if they are happy to sell it is unlikely that the buyer will be getting a great deal.

However, this sale sparked my interest because in this case Lloyds are forced sellers with a deadline of the end of next year to unload their whole stake. This follows their shambolic attempt at a disposal earlier in the year to the Co-Op Group when not only the deal collapsed but the Co Op bank nearly did too! 

So on that basis it may be coming cheap which indeed it is as it is being sold at between 0.7x to 0.9x book at the indicated price range. However, this does reflect the fact that TSB is probably over capitalised and as a result makes a very poor return on Capital Employed. Indeed an analyst at Espirito Santo estimates that this will be stuck at around 6% out until 2016. This suggests to me that a 0.6x price to book might be more appropriate and my feeling is reinforced by the fact that this pricing is apparently at a premium to the price they would have got from Co Op if that sale had gone through. This seems the wrong way round to me as I would have thought a trade buyer would have been willing and able to pay more given cost saving and other synergies etc. Nevertheless I guess it might still go OK and possibly go to a small premium which is usually what vendors aim for ideally and indeed what some of the recent spate of Retail IPO's did. However, I note a number of those have now gone to a discount to the offer price. Lloyds will also have a further 75% to sell in the next year or so which could cap the price.

The other disappointment for me is on the dividend policy where although they say they could pay out 40 to 60% of underlying earnings they are not going to pay a dividend until the financial year ending 31 December 2017, which could even just be a final dividend actually paid in 2018. They then also caveat this with the following: "The TSB Board intends to review, on an ongoing basis, the expected timing and quantum of any dividend payments in the context of progress on delivery of TSB’s strategy and the broader operating environment." Thus I suppose dividend could therefore come sooner or later than 2017 on that basis. As an offset to this though they are offering individuals a 1 for 20 bonus issue if stock is held for a year on up to £2000 worth of stock which is a plus if you are planning on being a long term holder.

Beyond that their strategy seems to be to go for growth on the back of the strong balance sheet. While that sounds good, I question how easy it is going to be for them with all the challenger back like Metro, Tesco and M&S etc. being launched it seems competition is increasing. So they could just as easily lose business if ex-Lloyds customers are disgruntled about being shunted into the TSB. In addition you have to ask yourself do you really want to invest in a Bank which is going for growth in a housing market which is hotting up, just ahead of rates rising and with UK consumers still generally over indebted?

On this basis although TSB was once "The Bank That Likes to Say Yes" (see the cheesy 80's ad below), before they were bought by Lloyds - my answer to the question is No.

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