Inspired move or a #19bn spoiler?; Lloyds TSB's bid for Abbey

0 Comments | Sunday Herald, The, Feb 4, 2001 | by Teresa Hunter

THE CITY'S VIEW: Teresa Hunter believes Lloyds TSB cannot afford to be anything but serious about its Abbey offer - and that spells bad news for BoS

THE Bank of Scotland blew it when its failure to decide who should get which top job prevented it agreeing a deal with the Abbey National fast enough to stop someone else coming in and spoiling the party. This is the view of City analysts who believe that if anyone gets Abbey - which was the first building society to become a bank in 1989 - it is now going to be Lloyds TSB.

English market watchers last week dismissed as "Scotto-centric" and "hopelessly naive" any suggestion that Lloyds was less than serious.

"Believe me. Lloyds is deadly serious. It would not have launched this bid without having done its homework. Failure would call into question the management's future. And it would be an enormous blow for Peter Ellwood [Lloyds TSB's chief executive]," said one source.

Furthermore analysts believe that dithering over who got which job could have cost Bank of Scotland its independence. Having already lost NatWest to Royal Bank of Scotland, failure to clinch the AbbeyNat deal will leave the bank weakened. The belief is that it could itself have ceased to exist as an independent entity within the next couple of years, having been snapped up by the likes of HSBC.

The Lloyds bid has become the "darling" of the City. It is the only offer on the table which will pay shareholders a premium. Institutional investors, who control 65% of the shares, are signalling that they will happily await the six months or so any referral to the competition authorities might entail. Lloyds has a proven track record of making acquisitions succeed, and analysts are confident it will repeat the trick with Abbey.

The two big stumbling blocks are the questions of competition and job losses, but there is great scepticism that either will seriously stand in Lloyds way.

Analysts are unimpressed at the prospect of the loss of 9000 jobs and do not see it as a decisive political issue. Staff cuts would not be concentrated in a particular location they argue, and furthermore a referral would push the story back to the other side of the election.

One analyst commented: "MPs are not going to be besieged with sob stories because a branch closes in their constituency and 20 people are out of work. Corus [the former British Steel] is only a story because the jobs are concentrated in one area."

Lloyds also claims nobody was ever made compulsorily redundant after any of its deals, and that all jobs were and will be trimmed through natural wastage, although that's not quite how former Cheltenham & Gloucester staff remember the acquisition of their building society in 1994. But any hint that particular locations such as Glasgow - where Abbey owns Scottish Mutual - or Milton Keynes - where it is a big employer - could suffer disproportionately, could cause Lloyds problems.

That said, staff employed at both C&G and Scottish Widows have both grown slightly since their takeover, although nearly 12,000 posts were lost following the TSB deal.

The question of diminishing competition is also debatable. The RBS's bid for NatWest is seen as a key precident. This was not at first referred to the competition commission, even though the acquisition left it with substantial shares in many market segments.

Furthermore, the overlap of operations between Abbey and Lloyds is not so great. It is the branch network where duplication is at its heaviest.

Although the deal would just tip Lloyds over 25% of current accounts, giving it 29% of the market, Abbey National only has 4% of accounts which is not considered significant.

The only grounds for suspecting that political influence might be brought to bear would be over the loss of a low margin savings and loans operator. The government is committed to providing consumers with good value products and former building societies typically undercut the traditional banks on price. But the main reason why observers believe Lloyds is desperate to swallow Abbey is because it is itself increasingly being viewed as an institution which is "running out of steam".

One source said: "Lloyds definitely needs to do a deal. It is a deal-driven bank which grows through acquisitions. It is seen to be at a strategic cross-roads. The impetus from C&G and TSB has petered out.

"They said they were going to move into Europe, traipsed round with advisors but didn't find anything. They failed and they don't like to fail."

In short, by launching the bid for Abbey, Lloyds has reminded the City what it does best. It does deals - and if it can't do them, then the City wants to know what it does do.

Another commentator said: "Lloyds itself is struggling with revenue. Its strategy is to make acquisitions and cut costs, that's how it increases its revenue. It doesn't offer particularly attractive products to the consumer, there are cheaper packages around. So it cannot grow its business organically. It can only do it through acquisitions."