The Board of The Co-operative Group has agreed to proceed on the basis of non-binding heads of terms with Lloyds Banking Group (“LBG”) in relation to the acquisition of the “Verde” business. The move by The Co-operative Group would create a real challenger bank on the High Street with almost 1,000 branches.

The Co-operative Group and LBG are now working towards agreeing definitive, binding documentation, subject to the satisfactory completion of further due diligence and Board approvals. Completion of the transaction is expected before the end of November 2013 and will be conditional on, among other things, regulatory approvals from the FSA, HM Treasury and the European Commission.

Highlights

• The Co-operative Group to acquire 632 branches from LBG with an estimated 4.8m customers, thus creating an enlarged Co-operative Banking Group, differentiated through the quality of its customer-centric, member-led, ethically driven, banking model
• The acquisition meets the recommendation from the Independent Commission on Banking to create a challenger bank with a market share approaching 7% of today’s UK personal current accounts
• The transaction would accelerate delivery of The Co-operative Group’s strategy, creating the compelling co-operative alternative with a combined bank network of almost 1,000 branches across the UK, representing nearly 10% of today’s UK bank network and 11m customers
• The acquisition would increase the scope and reach of The Co-operative Group as a whole and enable The Co-operative Banking Group, through an extensive branch network, to provide banking services to The Co-operative Group’s wider member and customer base
• Paul Pester, currently Chief Executive of Verde, would become Chief Executive of the combined banking business, subject to FSA approval.

Under the heads of terms:

• The Co-operative Banking Group to pay LBG an initial consideration of £350m; with a further £400m of additional earn-out payments in present value terms between completion and 2027, subject to the meeting of certain performance measures
• To fund the initial consideration, The Co-operative Group will issue perpetual subordinated debt of £350m fully underwritten by LBG
• The Verde business is expected to have a balance sheet as at 31 December 2013 (estimated by LBG) of around £24bn, with fully matched customer assets and liabilities, leaving no funding gap
• It is anticipated LBG will initially provide £1.5bn of equity capital to fund Verde at completion under a standardised capital model. Under an advanced capital model and subject to regulatory approval, the equity capital to be provided by LBG is expected to be in the range of £1.1bn to £1.4bn
• LBG will also provide access to around £500m of Tier 2 capital
• The Verde business is estimated to have around £11bn of risk weighted assets on a standardised basis
• LBG will use the TSB as the banking brand for the Verde business and will make this transition from Summer 2013, prior to completion of the proposed transaction
• Once it becomes part of The Co-operative Banking Group, the TSB business would operate separately for a period of time ahead of integration with the existing Co-operative Banking Group business
• The combined bank would ultimately operate on a separated version of the existing proven LBG IT platform which would be managed by LBG, for the enlarged Co-operative Banking Group, on a managed service basis, under commercial market terms
• It is anticipated that the earliest point at which the migration of the existing Co-operative Banking systems to the LBG IT platform would begin is 2015

The heads of terms is expected to move to a full sale and purchase agreement, subject to satisfactory completion of due diligence processes and Board and regulatory approvals. However, agreement may not be reached on a definitive sale and purchase agreement or, once signed, the agreement may not become unconditional. Accordingly, there is no certainty that the proposed transaction will proceed, or that it will proceed on the terms set out in the non-binding heads of terms.

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