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Lloyds to buy HBOS, UK government welcomes merger

Latest update : 2008-09-18

British bank Lloyds TSB has agreed to buy rival HBOS to create a 28 billion pound ($50 billion) mortgage company. The UK government intends to smooth approval of the merger, in order to ensure the UK financial system's stability.

LONDON - Britain's Lloyds TSB sealed a rescue takeover of HBOS Plc on Thursday to create a dominant mortgage and savings bank in a $22 billion deal helped through by a competition law change.

 

Amid fears market turmoil could claim another UK victim, HBOS shares have been battered in past days by fears it was struggling to raise funds in wholesale markets as a global credit crunch deepened.

 

The focus on HBOS came as other banks around the world staggered under the weight of the crisis and raised memories of Northern Rock bank, which was rescued by a state-bailout in February.

 

Lloyds will offer 0.83 of its shares for each HBOS share, valuing them at 232 pence based on Wednesday's closing price of 279.75p, a 58 percent premium over HBOS's last price of 147.1p, but less than a third of what they fetched a year ago. The deal values HBOS at 12.2 billion pound ($21.7 billion).

 

By 0810 GMT, HBOS shares had jumped 30 percent to 191p while Lloyds shares fell 6 percent to 263p, trimming the value of the deal to 218p per HBOS share.

 

"We had expected HBOS would struggle to make a profit through 2010, but we had not expected it would fall victim to the credit crunch," said Sandy Chen, analyst at Panmure Gordon.

 

"The spectre of another run on customer deposits, combined with the run on wholesale funding that HBOS has been experiencing, was what pushed HBOS into the arms of Lloyds TSB, with the support of the UK government," Chen added.

 

Lloyds said it expects the deal to boost annual earnings by over 1 billion pounds a year by 2011 through cost savings and boost its earnings per share by over 20 percent a year.

 

Cost savings could be even higher and the company may be downplaying prospects to avoid a backlash about job and branch closures, analysts said.

 

Lloyds CEO Eric Daniels will remain as chief executive of the enlarged group and Victor Blank will stay as chairman. Other positions, including that of HBOS CEO Andy Hornby, have not been decided.

 

Lloyds investors will own 56 percent of the enlarged group.

 

The UK government said it intends to smooth regulatory approval of the takeover -- despite the enlarged group having a 28 percent share of mortgages -- to ensure the stability of the UK financial system. Alistair Darling, UK finance minister, said he fully supported and welcomed the deal.

 

Lloyds has talked to HBOS about a deal in the past, but a merger was widely viewed as unlikely to be permitted by regulators. Darling said the government would change legislation to modify competition laws so that the deal can go through.

 

"This not only creates the potential for massive cost savings, though these are unlikely to be stressed up front, but also has the extra benefit of leaving the UK's banking competition policy in tatters," Bruno Paulson, analyst at Bernstein, said in a note, saying this had previously limited Lloyds' growth prospects.

 

Daniels denied it was a government-brokered rescue of its rival, and said the banks have been in talks for several weeks.

 

"There shouldn't be any impression this is a shotgun marriage or a forced marriage, this is something that's been looked at for a good long while.

 

"Our most recent set of conversations have taken place over the last several weeks," he told reporters on a conference call.

 

BLACK HORSE RIDES IN

 

Lloyds said the combination will strengthen its ability to serve UK customers in current difficult markets. But it will cut Lloyds' capital cushion and leave the enlarged group reliant on wholesale funding, so there are risks, analysts said.

 

Lloyds' core tier 1 capital ratio -- a key measure of financial strength -- will fall to 5.9 percent due to the deal, below the 6 percent regarded as comfortable.

 

Daniels said he would target a ratio of between 6 and 7 percent and will pay this year's final dividend in shares, rebase the dividend next year, and consider asset disposals on top of the cost savings to achieve this.

 

He declined to comment on what assets could be sold. HBOS's Australian arm Bankwest could be among the businesses on the block, analysts have said.

 

Daniels said there would be job cuts, but that reports it could result in 40,000 redundancies "sounds very much on the high side".

 

Merrill Lynch, Citigroup and Lazard advised Lloyds. Morgan Stanley and Dresdner advised HBOS.

Date created : 2008-09-18

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