Lloyds takes over HBOS in $21.7 billion deal with British PM Brown's support news
19 September 2008

The recent 12.2 billion-takeover of UK's largest mortgage lender Halifax Bank of Scotland (HBOS) by Lloyd's TSB Group Plc reportedly has the blessings of the highest office of the land. It was only after assurance from British Prime Minister Gordon Brown that competition watchdogs wouldn't derail the deal did Lloyds Chairman Victor Blank go ahead.

''The transaction could have only happened if the government was prepared to give support in relation to competition issues,'' Blank said at a news conference in London yesterday. ''What the prime minister said on the night to me was the government would give that support. It was only when that confirmation was given to us that we could move forward. A number of discussions had taken place, but that accelerated it dramatically.''

The takeover agreement was announced yesterday, averting a repeat of the Northern Rock Plc collapse, which forced the government to nationalise the lender in February. (See: UK decides to nationalise ailing bank Northern Rock)

Lloyds will offer 0.83 of a share for one HBOS share, valuing them at 232 pence based on Wednesday's closing prices, or a 58 per cent premium. That valued HBOS at 12.2 billion ($21.7 billion), only a quarter of its value a year ago.

Blank legitimately feared a Competition Commission inquiry that might delay a takeover, or block it altogether, considering the dominance the combined entity would have in the country. The two banks will control 28 per cent of the UK mortgage market and more than 20 per cent of bank checking accounts. Hence, winning government support was critical.

That process was eased by the relationship between the head of government and the head of Lloyds TSB. The Labour prime minister had played host to Victor and his wife Lady Blank at Chequers, his country retreat. The two men knew one another from 1998 to 2006, when Brown was chancellor and Blank was chairman of Trinity Mirror Plc, publisher of Britain's biggest pro-Labour newspaper, The Daily Mirror.

The idea for a Lloyds takeover had been germinating for six weeks, according to Blank. At that time, the chairman had spoken to his CEO Eric Daniels in his office. Daniels then called HBOS CEO Andy Hornby to arrange a drink to discuss the possibility, Blank said in an interview.

In fact, Lloyds TSB and HBOS have long considered some sort of deal. The two companies have held talks ''on and off'' for the past seven years, Daniels told reporters.

''There have been conversations,'' he said, including before he joined the bank as consumer head in 2001.

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 per cent a year.

Cost savings are likely to be even higher and Lloyds may be playing down prospects to avoid a backlash about job and branch closures, analysts said. The takeover is likely to result in job cuts, the two banks said, which brought accusations from trade unions that the government had brokered a ''shotgun marriage.''

''People inside HBOS are bewildered by the speed of events and people can't understand why it is happening so quickly and are very worried,'' said Ged Nichols, general secretary of the Accord union, which represents 32,000 HBOS employees. ``They seem to be proceeding with unseemly haste.''

Expectedly, the management refuted all such accusations and said that the deal was struck purely on commercial terms. "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," Daniels said. "It's a commercial deal ... we struck the deal on commercial terms.''

Lloyds, whose shareholders will own 56 per cent of the enlarged group, said the combination would strengthen its ability to serve UK customers in the current difficult markets. It will have a quarter of current accounts, rank first for savings accounts and have 3,000 branches and over 135,000 staff.

But it will cut the bank's capital cushion and leave it more 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 per cent due to the deal, below the 6 per cent regarded as comfortable.

Daniels said he would target a ratio of between 6 and 7 per cent and will pay this year's final dividend in shares, cut the dividend next year, and consider asset disposals on top of 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 reports that the deal could result in 40,000 redundancies ''sound very much on the high side.''

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

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Lloyds takes over HBOS in $21.7 billion deal with British PM Brown's support