A white knight on a black horse

By Richard Hunter | 18 Sep, 2008 

Following unprecedented events in the financial markets over recent days, turmoil within the banking sector and government intervention in an attempt to pacify nervousness, the “too big to fail” syndrome seen in the US has arrived in the UK.

HBOS is to be acquired by rival UK bank Lloyds TSB. The deal is being structured on an all share basis, with holders of HBOS shares receiving 0.83 Lloyds TSB shares for every one HBOS share held – as of the close of business on the 17th September, the deal values each HBOS share at 232p (using 279.75p as the Lloyds TSB closing price). As for the dividend, the enlarged Group intends to pay the final dividend for the 2008 financial year in shares. Thereafter the Group intends to pay a 2009 dividend based on a payout ratio of 40% of underlying earnings and a progressive dividend policy thereafter.

The combined group will have a branch base of around 3000 outlets, a 28% share of the UK mortgage market, a 35% share of the UK current account market and a staff base of around 144,000 members. Whilst competition issues would normally preclude such a takeover – Lloyds TSB was unable to buy Abbey National back in 2001 – these are subordinate to the public interest, with the political decision having been made that a failure of HBOS would have resulted in systemic problems in the UK and therefore could not be allowed to happen.

Further out, the combined entity will be a major hitter in the UK banking market. The deal will result in significant cost synergies – estimated by management at Lloyds TSB to be in excess of £1 billion per year by 2011 – and it has come at a time when stability in the banking sector is welcomed news. One potential drag will be something that has beleaguered Lloyds TSB over recent years (and therefore its share price), namely that it has remained very much UK focused in its operations, thus lacking diversity. This will not be helped by the acquisition of HBOS, and no doubt the market will be poring over the details of the deal over the coming days in order to arrive at a consensus.

For the moment, some nerves will have been calmed, but the market has some way to go yet.