Outlook: Royal Bank eases ahead in battle of the Scots

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The Independent Online
SO FINALLY Royal Bank of Scotland has got round to making its offer, and characteristically parsimonious it is too. So much so, that by the close of trade yesterday, the value of its bid trailed that of Bank of Scotland by some distance.

We have to assume, of course, that this is not Sir George Mathewson's final shot. Apart from being a little biggest than Bank of Scotland, the Royal has the advantage of a sugar daddy, in the shape of Banco Santander, to help top up the cash element of its offer, as well as the prospect of a Guinness-style share-support operation (legal this time) through CGU's commitment to buy pounds 300m of stock.

Even so, there comes a point when raising a bid largely made up of shares becomes a zero sum game, with the stock market discounting the extra dilution involved by marking down the share price accordingly. Both Royal Bank of Scotland and Bank of Scotland must be close to that point. Furthermore, there is a quite high degree of shareholder overlap between the three banks, so for a large number of shareholders the process becomes one of robbing Peter to pay Paul.

There is, of course, the intriguing possibility that shareholders divide down the middle and by backing Bank of Scotland and Royal in equal measure, ensure that both bids fail and NatWest remains independent. In practice, however, this outcome is rarely allowed to occur and once both banks have their final offers on the table, clear water ought to emerge quite quickly between winner and loser.

In the end, then, the battle will come down to whose management approach to NatWest is the more credible and can deliver the most value. On this front RBS looks already to be easing ahead. For starters, the RBS proposal seems more substantial, without relying as heavily on breakup of NatWest. Its plans for cost cuts and revenue enhancement at NatWest, besides being larger than those of Bank of Scotland, are also impressively detailed and precise, and therefore rather more convincing than those of its rival. One reason for this is that Royal Bank spent a very considerable length of time preparing to bid for Barclays, and has been able to transfer these plans onto NatWest.

Bank of Scotland's Peter Burt was always hopeful that the Royal would stick to its original prey, but unfortunately for him, there doesn't seem to be the same appetite in the City for a Barclays takeover as a NatWest one. The game's not over yet, of course, but right now Mr Burt looks like someone who's a piece or two down.