RBS Shares Are Worth 10 Times as Much

LONDON -- This morning, I took my daily look around the stock market for today's risers and fallers. What immediately caught my eye was a 960% increase in the shares of Royal Bank of Scotland (NYSE: RBS  ) .

What has happened at RBS to cause its shares to rise almost tenfold in a single day? Is it the subject of a huge takeover bid from a Middle Eastern sovereign wealth fund? Has it just made megabillions in a well-timed short on plunging European financial markets?

From 10 to one
Alas, the answer is much more mundane. Just before 8.30 a.m. EDT, RBS announced what is known as a "10-for-one consolidation" (here is the official notice).

Following approval by its shareholders at its annual general meeting on May 30, RBS is to cancel its existing 59,554,319,127 ordinary shares of 25 pence. These will be replaced by 5,955,431,912 ordinary shares of 1 pound each. In other words, each 10 ordinary shares in RBS (with a nominal value of 25 pence) have been replaced by one ordinary share (with a nominal value of £1). In effect, RBS's equity capital has changed as follows:

Before consolidation

Ordinary Shares in Issue

Share Price (Friday's close)

Market Value of Ordinary Shares

59,554,319,127 19.99 pence 11.9 billion pounds

After consolidation

Ordinary Shares in Issue

Share Price (Friday's close)

Market Value of Ordinary Shares

5,955,431,912 211.99 pence 12.6 billion pounds

In effect, the market value of RBS has increased by about 720 million pounds since Friday, June 1. Thus, the RBS share price is up about 6% today (in a strongly rising market up about 2%).

In short, RBS has not risen in value by 960% today. Instead, a 10-for-one share consolidation has altered its capital structure while apparently boosting its share price ninefold.

From 20 to two
In common with many members of the blue-chip FTSE 100 index of elite British businesses, RBS also has American Depositary Receipts. These are foreign shares listed in the U.S. -- in this case on the NYSE.

As the U.K. shares of RBS have undergone a 10-for-one consolidation, its U.S. ADRs must follow suit. Hence, one RBS ADR no longer represents 20 ordinary shares, but two ordinary 1 pound shares.

In summary, all 59.6 billion ordinary 25 pence shares in RBS have been cancelled and replaced ten for one with new ordinary 1 pound shares. There's nothing to see here, people, so please move on!

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Cliff does not own shares in Royal Bank of Scotland. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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