LONDON (Reuters) – Lloyds TSB (LLOY.L) sealed a rescue takeover of HBOS Plc (HBOS.L) on Thursday to create a dominant British mortgage and savings bank in a $22 billion deal helped through by the government.
A change in competition law ensured the credit crunch did not claim another victim, after HBOS shares were battered in the past week by fears it was struggling to raise funds in wholesale markets.
The focus on HBOS came as other banks around the world staggered under the weight of the crisis and recalled the state bailout of UK bank Northern Rock in February.
Lloyds will offer 0.83 of its shares for each HBOS share, valuing them at 232 pence based on Wednesday’s closing prices, or a 58 percent premium. The deal values HBOS at 12.2 billion pound ($21.7 billion), only a quarter of its value a year ago.
By 6:10 a.m. EDT, HBOS shares had jumped 44 percent to 212p while Lloyds shares added 1 percent to 282.25p, nudging the value of the deal to 234p 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 specter 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 playing down prospects to avoid a backlash about job and branch closures, analysts said.
Lloyds CEO Eric Daniels will remain as chief executive 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.
COMPETITION LAW “IN TATTERS”
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 courted HBOS previously but regulators in the past would not have allowed a bank with such big positions in mortgages, current account and savings.
The credit crunch has changed that. Darling said the government would change legislation to modify competition laws so that the deal can go through.
Bruno Paulson, analyst at Bernstein, said it left “the UK’s banking competition policy in tatters”.
“A year ago it would have been very difficult for this deal to have gone through, but we live in unusual times,” Daniels told reporters on a conference call.
But he denied it was a government-brokered rescue 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,” he said.
Lloyds said the combination will strengthen its ability to serve UK customers in the current difficult markets.
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 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 reports that the deal could result in 40,000 redundancies “sound very much on the high side”.
Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz), Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Lazard (LAZ.N: Quote, Profile, Research, Stock Buzz) advised Lloyds. Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Dresdner (ALVG.DE: Quote, Profile, Research, Stock Buzz) advised HBOS.
By Steve Slater
(Additional reporting by Lorraine Turner, Paul Hoskins, Sumeet Desai, Laurence Fletcher)
(Editing by Louise Ireland and David Cowell)