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U.K. takes majority control of Royal Bank of Scotland

EMILY FLYNN VENCAT

Associated Press

November 28, 2008 at 5:35 AM EST

LONDON — Royal Bank of Scotland Group PLC said Friday the British government will take majority control of the bank — buying close to a 60 per cent stake — after its shareholders shunned a stock offering.

RBS, which has indicated it could post its first ever annual loss this year, said investors bought just 0.2 per cent of shares offered to them in a 20 billion pound ($31-billion U.S.) government plan to recapitalize the bank. The offer, issued last month, expired on Friday.

Under the terms of the plan, the government agreed to buy any shares not purchased by investors.

As a result, the government is expected to buy nearly all 20 billion pounds worth of shares, with 15 billion pounds going for ordinary shares and 5 billion pounds for preference shares.

This will leave the British Treasury owning 57.9 per cent of the bank, and sitting on an immediate paper loss on its investment of around 5 billion pounds.

The British Treasury was not immediately available for comment.

The deal forms the largest part of the government's wider plan to recapitalize Britain's banks.

Last month, RBS, Lloyds TSB Group PLC and HBOS PLC agreed to sell a combined 37 billion pounds worth of stock to shore up their balance sheets. In all three cases, the government guaranteed to buy any shares not purchased by investors.

Shares in RBS were roughly flat at 55 pence in early trading on the London Stock Exchange, as the market had been widely expecting that the government would be taking a majority stake in the bank.

Last week, shareholders approved the capital raising plan though it was clear that ordinary investors would be unlikely to buy the new shares because they were selling for 65.5 pence — around 28 per cent more than the existing share price.

RBS shares were above 380 pence last December, and above 200 pence as recently as Sept. 26.

The bank is expected to buy the preference shares back from the government as soon as possible because it will be forbidden from paying any dividends to ordinary shareholders while the preference shares are outstanding.

The drastic fundraising plan comes on top of a 12 billion pounds rights issue by RBS earlier this year — at the time the biggest ever rights issue in Europe.

RBS has been one of the hardest hit European banks in the financial crisis because of its large exposure to sub-prime loans and its expensive purchase of ABN Amro bank just before the credit crunch.