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‘Scores of people have spoken to me about this deal and voiced their concerns. They are horrified.’

By Ian Fraser

Sunday Herald

September 28th, 2008

A miserable Andy Hornby and a happier Lloyds CEO Eric Daniel at the merger press conference; picture courtesy of Press Association / Daily Mail

IT WAS presented as a fait accompli.

On Thursday September 18, at 7am, both Sir Victor Blank and his American sidekick, Eric Daniels, looked like the cats that had got the cream. The chairman and chief executive of Lloyds TSB, who were later seen alongside a more ragged-looking Andy Hornby, chief executive of HBOS, retained a smug look throughout a day of explaining and selling the banking deal of the decade to analysts and financial journalists.

They cannot have been prepared for the extent of the backlash to their plans to take over HBOS. Most other large British banks may quietly welcome the deal and HBOS shareholders may be generally thankful they have ended up with something rather than nothing, but analysts were divided about the merits of the deal.

Worse than that … there is now a cacophony of voices, not least here in Scotland, from outside the world of banking who are uneasy with aspects the deal – and some are now determined to stop it. Many, for example, are furious that Prime Minister Gordon Brown has brushed aside competition rules to allow it to go ahead.Professor Stewart Hamilton, professor of finance at Swiss business school IMD, believes the decision to make the new behemoth immune from the competition authorities may be legally questionable. “I would question whether Brown has the executive authority to make the new bank immune from anti-trust legislation. That could well be subject to legal challenge.”

Some analysts and Lloyds TSB investors are wondering why they should have to suffer the pain of a dividend cut just so Lloyds can take on a more troubled bank that increases their exposure to risk. Both banks’ share prices plummeted at the start of last week as analysts questioned the deal. Those at French bank Société Générale said the transaction is “not in the best interests of shareholders and creates a UK banking giant as we go into a significant UK economic downturn.”

Jonathan Pierce, a banking analyst at Credit Suisse, says the deal will generate a £10 billion black hole. Because of the fall in Lloyd’s share price since the deal was announced, Pierce says it will need to inject £10bn of cash if the deal is to go ahead. Pierce added that the merged bank would be more exposed to UK specialist mortgages, credit cards, personal loans and commercial property – “all the assets we worry about”. He cut his price target on Lloyds from 220p to 195p, adding weight to several analyst downgrades. He also believes that Lloyds may need to raise its offer for HBOS.

The other main camp of dissenters are the Scottish patriots, including the former academic Sir Donald Mackay, who just cannot bear to see a national icon like the Bank of Scotland fall into English hands. This faction, already dismissed as “Brigadoon” fraternity by some investors in the City, seem determined to disentangle the old Bank of Scotland from the Lloyds Halifax combine. If Professor Hamilton is right about the decision to make Lloyds Halifax immune from competition watchdogs, that would help his case.

However observers note that there is much rewriting of history going on, with some Scottish business people and financiers conveniently forgetting that the Bank of Scotland effectively ceased to be in September 2001. The “Bank” they talk about – and Bank of Scotland was always called “The Bank” while RBS was called “The Royal” – probably had its heart and soul removed at the time of the Halifax merger seven years ago.

One option for Mackay, who has enlisted financial luminaries such as former chairman of RBS Sir George Mathewson to his cause, is to buy out the Bank of Scotland part – meaning the retail branches in Scotland and the global corporate and commercial banking business which is still headquartered in Edinburgh once the Lloyds HBOS merger completes early next year.

A key problem, however, would be funding. It has been estimated they would need to raise some £6bn for the purchase and there is not much appetite for this kind of thing in the global financial marketplace right now – apart possibly from a few brave private equity funds like Texas Pacific Group and Lone Star, or perhaps a sovereign wealth fund like that of Abu Dhabi.

“Scores of people have spoken to me about it and voiced their concerns,” said Mackay. “They are horrified. The great feat of Bank of Scotland is that it has been an innovative bank. It led the introduction of electronic home banking. It has been innovative in its deal-making. And that record must be continued.”

He also warned “over-concentration of financial power in London” was “not a good thing, for the UK economy or for Scotland” and the deal presented “a serious risk of a diminution of competition”. These views are thought to be shared by Mathewson, who says he is prepared to set aside old rivalries to help save the bank.

Others involved in the plot include Jim Spowart, founder of Intelligent Finance, and Alex Neil, the SNP MSP. However, on Saturday the group said it wanted to avoid a “media circus”. Spowart insists his plan is still active and that international investors are keen to become involved. However, he declined to elaborate, saying this could jeopardise any discussions.

In a joint statement with Alex Neil, Spowart said: “Following on from the Sunday Herald’s exclusive story last week, we confirm there a number of possibilities being explored, which may or may not be successful. Over the past week there have been numerous high-level discussions going on for the benefit of Scotland. We hope that some of these ideas will bear fruit, but we’ve always maintained the chances might be slim indeed.”

If a counterbid for the whole of HBOS does emerge, it is likely to come from Barclays, HSBC or BNP Paribas.

If the Lloyds deal goes through, Blank and Daniels would certainly be getting their hands on the pride of Scottish banking, and one of the UK’s leading banks, for a fraction of its intrinsic worth. In February 2007 – before the credit crunch intervened to reveal flaws in its business approach – HBOS had been valued at £44bn. However, the unlikely duo of Blank, the cricket-mad son of Ukrainian immigrants to the UK, and Daniels, the son of a German professor and a Chinese mother, who hails from the open plains of Montana, had been able to snap it up for just £12bn.

It has been well-documented that Blank and Daniels had been mulling a tie-up with HBOS since May 2006 when Hornby – who became the Scottish bank’s CEO three months later – first came knocking. However, until September, even Blank’s influence with Number 10 was insufficient to persuade the prime minister that such an oligopoly should be created at the expense of UK consumers.

To Daniels and Blank, the deal must have seemed too good to be true. They believed the opportunities for “synergy savings” – City speak for the closure of perhaps 1000 UK branches and the loss of say 40,000 UK jobs – were unparalleled. The ability to “take out” a nuisance competitor would also enable them to achieve what analysts call “pricing power”.

Much of the political focus in Scotland is now on preserving as many jobs and as much of the BOS influence as possible. Alex Salmond chaired a meeting of the Financial Services Advisory Board last week. The board now wants to persuade Lloyds to make Edinburgh a UK hub for activities such as life insurance, fund management and SME loans.

And the Livingston MP Jim Devine has written to the chairman of the House of Commons’ Scottish Affairs Committee to demand a probe into the circumstances surrounding the takeover. Devine said: “I have been approached by constituents who work for HBOS who have voiced serious concerns relating to the implications of the proposed takeover. I do not accept that HBOS finds itself in this situation solely as a result of spivs and speculators. There is a clear need for us to look closely at the takeover of what was one of Scotland’s most successful banks until it was merged with Halifax.”

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