HBOS shares find their feet after broad backing for deal

THE lifeline takeover of HBOS by Lloyds TSB appeared to be back on track last night after the markets rallied in response to support for the deal from investors, analysts and the government.

Share prices for both HBOS and Lloyds surged yesterday, helping to shore up the FTSE, which closed 1.17 per cent up, despite a late afternoon retreat.

Although most banks did well, Royal Bank of Scotland benefited least as doubts remained over the only remaining independent Scottish bank's ability to withstand the collapse of Fortis, one of its two partners in the massive takeover of ABN Amro.

And the FTSE's fortunes failed to cross the Atlantic, where the Dow opened with a huge fall, sliding 1.71 per cent in less than an hour, ahead of votes on the $700 billion scheme to bail out US financial institutions.

There had been fears on Tuesday that Lloyds' takeover of HBOS would be killed off, or priced down, after the Edinburgh-based bank saw £1bn wiped off its value.

But yesterday, the banking sector spearheaded the surge in the markets, with HBOS closing 21 per cent up.

And although the shares were still worth far less than what Lloyds had offered for them, analysts played down the importance of the slide. Under the terms of the takeover, Lloyds is paying 0.83 of its own shares – currently equivalent to 207.5p – for each HBOS share, which closed yesterday at 148.1p.

Support for the move came yesterday from Credit Suisse analysts, who said there was "only a 30 per cent chance of failure priced in at current levels" and highlighted the interests of institutional investors with stakes in both banks in securing a deal.

On whether they believed the deal would still go through, the analysts said: "Probably yes. Not only is there considerable regulatory and political pressure to get this deal done, but there are considerable cross-shareholdings between the banks."

They added: "We think there's a danger people read too much into the discount. Unlike a 'normal deal', the potential downside in HBOS shares in the event the transaction doesn't proceed might be very significant. And so a relatively small risk of failure translates to a large discount."

Their theory was apparently backed by Standard Life Investments, a major investor in both banks. A source close to the Edinburgh-based fund manager told The Scotsman it was "supportive of the Lloyds TSB-HBOS deal at the current price".

SLI holds about 3 per cent of HBOS shares and about 1.5 per cent of Lloyds, ranking it the fourth-biggest HBOS investor and eighth-biggest in Lloyds. Barclays, Aviva, L&G and M&G all have stakes of more than 1 per cent in both companies.

David Buik of BGC Partners said: "Perhaps the price may be altered … but the deal must stand. Failure to consummate would be viewed as horrific for the market."

The Bank of Scotland and Halifax owner has also been bolstered by support from Gordon Brown, the Prime Minister. A spokesman said yesterday the government was in close contact with those involved in the takeover, adding:

"The Prime Minister, as he said (on Tuesday], is confident the takeover will go ahead."

The frozen money markets were also kick-started yesterday by the Bank of England's efforts to pump in billions of pounds for nervous banks. Overnight inter-bank rates eased back from Tuesday's highs as a result.

The central bank's extra £16.8bn – available for one week – comes on top of £22.5bn injected since last Friday as banks scared of losses hoard cash.

The Bank of England said it "continues to monitor money market conditions closely".

Meanwhile, new banking rules to clamp down on the causes of the financial crisis were put forward by the European Commission.

Among the demands was that sellers of risky loans be made to hang on to part of the investment and share the risk.

The commission proposes that sellers should hold at least 5 per cent of the investment when they sell loans repackaged as securities, one of several long-term changes to stabilise European banking and improve supervision for banks that operate across several nations.

When Wall Street opened yesterday, some five hours before the crucial congress vote, it was to a massive loss. As well as fears over the bail-out, US shares were also depressed by some worse-than-expected US manufacturing data.

But US politicians appeared confident the rescue deal would succeed, with Steny Hoyer, leader of the House Democrats, saying: "I think the Senate thinks it has the votes and I think it probably will pass."

Before the package can be passed into law, it needs to be approved by both the Senate and the House of Representatives, where it was rejected on Monday.

• RBS last night said it expected that its Irish subsidiary, Ulster Bank, would qualify for the Republic of Ireland's plans to underwrite debts and savings of the country's six largest lenders.

Despite the Irish government maintaining that foreign banks would not qualify, RBS said Ulster Bank – which operates north and south of the border – would qualify, along with its mortgage provider First Active. A spokesman for RBS said: "We expect the application to be successful."