By Ian Fraser
Published: Sunday Herald
Date: 19 September 2004
After six weeks of posturing, HBOS last week decided against bidding for Abbey National. It gave a clear run to Banco Santander which could wrap up a £8.6bn Abbey takeover by November. Financial editor Ian Fraser reports.
JAMES Crosby, chief executive of HBOS, is putting a brave face on his decision to withdraw from any plan to acquire Abbey National, his biggest rival in the UK mortgage market. After six weeks of keeping the financial world on tenterhooks, Yorkshire-bred Crosby and his board finally decided last Tuesday that it was not worth proceeding with a bid. It was announced the next day.
But who have been the winners and losers in this phoney war that has beset banking during August? Despite risking allegations of cowardice in pulling out, HBOS is now a clear winner, not least in that the market sent its shares up 3% to 738p on the day of the withdrawal announcement. Investors were relieved that Crosby had avoided the twin risks of overpaying for what remains a damaged franchise and of getting mired in months of tedious and potentially futile negotiations with competition regulators.
Given that, according to Council of Mortgage Lenders’ figures, a merged HBOS/Abbey would have had 36.7% of the UK mortgage market, the competition issues may have proved insurmountable without major branch-level surgery.
After a campaign that probably went on too long, Crosby decided it would make more sense to focus on developing HBOS’s existing businesses. He said: “The real problem was how to avoid producing a fantastic deal for Abbey shareholders but one that didn’t produce a very good deal for our shareholders.” He may have feared repeating the mistake made by Sir Brian Pitman who, as chair of Lloyds TSB, paid £7 billion for Scottish Widows in 1999. Lloyds has never fully recovered.
HBOS, the UK’s fourth-biggest bank, feared it might have to offer more than 700p a share in order to secure Abbey, and it had also been spooked by Banco Santander Central Hispano’s recent, highly lucrative, sale of part of its 5.06% stake in the Royal Bank of Scotland. This added to the Madrid bank’s war-chest. Crosby instead ignored the blandishments of his merchant bank advisers and decided to walk away. He now claims to be looking forward to the challenge of taking on the Spaniards on his own territory. “We are a very competitive organisation and rather like the idea of someone new to have a go at. You can be assured we’ll be laying on a very special HBOS welcome for them on the high street.”
Ewan Stirling, investment director of UK equities at Standard Life Investments, said: “HBOS’s decision not to proceed with a bid … comes as a statement of confidence in its own business prospects.”
The Edinburgh bank’s decision to consider a bid also gave it the right to have a privileged peek at Abbey’s books in a “data room”. This will obviously have given it an otherwise unobtainable insight into the business model of its biggest UK rival.
There is also a high chance that the Edinburgh bank will have a stab at taking over the Irish assets of Melbourne’s National Australia Bank. These are soon to be hawked around on NAB’s behalf by investment bank Lazards. They include Dublin-based National Irish Bank and Belfast’s Northern Bank, both of which could marry well with HBOS’s existing Irish presence. HBOS already has a 19% share of the small business banking market in the Irish Republic. A takeover of NIB would make HBOS’s goal of overtaking Allied Irish Banks as the republic’s largest business banking player by 2005 ore achievable.
Given that Abbey now seems almost certain to come into Santander’s fold, analysts are also suggesting that HBOS, and perhaps also Lloyds TSB, will have a go at mopping up smaller UK mortgage players such as Alliance & Leicester and Bradford & Bingley.
But what of Banco Santander? It too seems a clear winner from HBOS’s decision to throw in the towel. It means a bidding war has been avoided and should allow the Madrid-based outfit to pick up Abbey for around its original offer price of £8.5bn while breaking the logjam in cross-border European bank takeovers. Speaking last Wednesday, Santander chairman Emilio Botin said: “I’m very pleased that the uncertainty has disappeared. We remain on track and Santander is determined to close the deal.” With the irritant of HBOS out of the way, and with EU approval in the bag, Botin now believes he could have the Abbey deal wrapped up by November 12.
On October 14, Abbey’s army of shareholders will be given the chance to vote on Santander’s offer; the Spanish bank needs 75% to register in its favour. Yet Santander does bear some wounds from the phoney war. Its reputation has suffered, as sources not a million miles away from The Mound have delighted in highlighting some of the less savoury aspects of its corporate governance record.
The UK public is now more likely to be aware that its 69-year-old chairman, Botin, is to stand trial on charges of misappropriating funds. The case revolves around extraordinary “golden parachutes” handed out to Botin’s former colleagues on the Santander board, Jose Maria Amusategui and Angel Corcostegui. The pair lost a power struggle with Botin but were rewarded with cuffs of £37m and £72m respectively. If found guilty, Botin could face 12 years in jail.
There is also the issue of possible nepotism on Santander’s board, highlighted last week by Vincent Cable, the Liberal Democrats Treasury spokesman. Four members of the Botin family sit on the bank’s board despite having a combined shareholding understood to be 2.8%.
Another body blow for Santander it that it has been forced to unwind its long-standing strategic alliance with HBOS’s arch rival, the Royal Bank of Scotland Group. Santander declared the alliance as good as over on September 9. It sold 2.5% of its 5.05% stake in RBS and said its two directors with places at the RBS top table, Botin and Juan Inciarte, would relinquish these roles in the event of a successful takeover of Abbey. The announcement also stated that RBS chairman Sir George Mathewson would step down from Santander’s board should it acquire Abbey.
HBOS’s withdrawal also means Abbey shareholders will get a lower than expected price for their holdings (around 580p per share as opposed to perhaps 700p). Abbey shares, buoyed by hopes of an HBOS bid, crashed 6% last Wednesday as arbitrageurs cut their losses, resigning themselves to the fact there would be no bidding war. Even so, Santander has responded keenly to shareholder concerns. Last week, it unveiled plans to make it easier for UK investors to hold its stock by paying quarterly dividends in sterling instead of euros.
The Spanish bank also said it hopes to obtain a listing on the London Stock Exchange by 2005 with a quotation in pounds. The move was aimed at placating Abbey investors who don’t want to receive Spanish shares in exchange for their Abbey holdings because of potential exchange rate risks. Santander expects to be able to wring out some €450m (£308m) in annual cost savings from Abbey within three years. That is obviously going to mean branch closures and disruptions to service at Abbey. Yet some analysts suspect Santander may have over- estimated the powers of its own IT system on to which Abbey functions are to be transferred.
Abbey staff, however, definitely seem better off with Santander. Last month, the Spanish bank met Abbey’s trade union and announced plans to eliminate 3,000 jobs, some 12% of Abbey’s workforce. But job losses would have been far higher in the event of an HBOS takeover.
Come November, it seems we’re going to have to get used to the idea of having a Spanish player on the high street. It’s not so bizarre and might even become the norm, with several other UK financial brands becoming overseas-owned. Who knows: that bastion of Britishness, Barclays, might itself be swallowed up by Bank of America or Citigroup in a few years’ time.
Copyright 2004 SMG Sunday Newspapers Ltd.