In These New Times

A new paradigm for a post-imperial world


Posted by alfied on September 30, 2008

By FT Reporters

Shares in HBOS, the UK’s largest mortgage lender, fell sharply on Tuesday, prompting speculation among investors that Lloyds TSB may attempt to renegotiate the terms of its £12bn agreed takeover announced last week.

Under the recommended offer, which was brokered by the Treasury and the Financial Services Authority, HBOS investors would receive 0.83 Lloyds shares for every share they own or the equivalent of 220p a share.

Lloyds shares, which have fallen 22 per cent since the deal was announced, rose 7¼p or more than 3 per cent on Tuesday to 224½p. That means its offer for HBOS is currently equivalent to 187p.

By midday Tuesday, however, HBOS shares were down 17p or 12 per cent at 125p – a 33 per cent discount to the current offer price.

The combination of Lloyds and HBOS would create a dominant force in everything from current accounts and mortgages to life assurance, with a combined mortgage book of £335.1bn and a retail deposit base representing about half of the UK savings market

But questions have been raised about the price Lloyds is preparing to pay for its rival. Several dealers said they thought Lloyds could revise its offer down to 0.6 of its shares for every HBOS share.

Both banks declined to comment beyond saying that they were pressing ahead with the acquisition process, which they hope to complete by the end of the year. Lloyds has already started work on assessing how the banks’ operations should be integrated following the completion of the deal.

Delays in the publication of the terms of the takeover – which is not expected before November – are adding to the uncertainty, as is this week’s nationalisation of Bradford & Bingley.

Several analysts have urged Lloyds TSB to renegotiate the terms of the deal given the current uncertainties in the global financial system.

Cazenove on Monday said Lloyds would be wise to raise capital and write down HBOS assets as soon as possible. It also cautioned that the terms of the deal could change. The broker estimated a £10bn writedown buffer between Lloyds TSB’s £11bn offer and HBOS’s estimated £21bn tangible book value.

Credit Suisse also said it thought the terms of the deal would be renegotiated. In a note to clients this week, the investment bank said the transfer of capital from HBOS’s shareholders was not advantageous to Lloyds’ investors under the current terms.

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