The finely poised takeover battle for NatWest appears to have swung in Bank of Scotland's favour.

Phillips & Drew Fund Management (PDFM), a major NatWest shareholder, has confirmed that it has decided to back its bid.

PDFM is one of Britain's biggest pension fund managers and owns 2.3% of NatWest, making it the seventh-biggest shareholder.

It also has stakes in both hostile bidders, Bank of Scotland and Royal Bank of Scotland.

Wooing investors

The only other major investors whose voting intentions are known are Norwich Union, Britannic Asset Management and Edinburgh Fund Managers.

Norwich Union is putting its 1.12% of NatWest's shares behind RBS; Britannic Asset Management, the 30th-largest NatWest shareholder with 0.8%, is also supporting RBS; while Edinburgh Fund Managers has pledged its 0.3% stake behind BoS.

Most shareholders are not expected to decide until later in the week. They have until 1300 GMT on Monday 14 February to give their choice.

Fund managers are meeting all three management teams this week and few analysts are prepared to take bets on who will win.

One of the Scottish banks must gain 50% of NatWest's shares or the bids will fail.

Clear as mud

The waters are further muddied by the fact that advisers from the major broking houses have come to no consensus.

The two offers are both very similar in value, leaving analysts to pore over the strategies of the three parties.

HSBC joins stockbrokers at Commerzbank and WestLB Panmure in expecting Sir David Rowland, chairman of NatWest, to see off the hostile bids.

Salomon Smith Barney analysts favour RBS, while brokers at Robert Fleming and Paribas prefer Bank of Scotland.

PDFM owns 4.5% of Bank of Scotland and 0.5% of RBS.

Rejection

NatWest has already rejected the increased takeover offers from its two Scottish rivals, saying both bidders are in danger of over-stretching their finances.

Sir David Rowland said: "Neither offer adds real value and both would leave the offeror financially stretched."

NatWest repeated its previous arguments that banking mergers were high risk and cited cases in the US which had destroyed value rather than generating benefits.

It also questioned the management experience at both Bank of Scotland and RBS, pointing out that neither had executives who had handled a major merger.

BoS: "Higher value"

Bank of Scotland said its final offer valued each NatWest share at about £14.41 and that the total value of the bid was 5.2% higher than the value of the Royal Bank's final bid.

NatWest shareholders would own 70% of the combined group, which would be headed by BoS chief executive Peter Burt.

BoS would sell off Gartmore, Greenwich NatWest and Ulster Bank and would undertake "major surgery" of the branch network with 21,800 redundancies.

Peter Burt said his bank's bid was worth £1bn more than RBS's and gave NatWest shareholders a bigger stake in the combined group.

"We have a better strategy to turn NatWest around," he said.

RBS: "More cash"

Under the Royal Bank's offer, NatWest shareholders would own 62% of the combined group, which would be headed by RBS chairman Viscount Younger.

RBS would sell off Gartmore and US Greenwich NatWest but keep UK Greenwich NatWest and Ulster Bank. It has no plans to close branches but does expect 18,000 redundancies.

On upping the bid, chief executive George Mathewson said: "We have injected more cash into this offer in a way which does not involve dismembering the NatWest business and does not disadvantage any of the shareholders involved."

The RBS bid includes an 'additional value share' - guaranteeing a £1 dividend by 2003 and estimated to be worth 70p each - which technically cannot be included in the offer price.

RBS's biggest shareholder, Spanish bank BSCH, is contributing additional cash of up to £500m to back the new bid.

Fight for survival

NatWest has fought hard to resist the bids, insisting it would be better off retaining its independence. It has said it will return £6.5bn to shareholders.

NatWest has gained credibility by poaching Gordon Pell from Lloyds TSB to reinvigorate its management team as head of UK banking.

The bank has also said it will cut 11,650 jobs by next year and further slim down by selling Gartmore, Greenwich NatWest, Ulster Bank and NatWest Equity Partners.

It says it will double its life and pensions market share, "significantly" grow its mortgage business, boost online customers to one million by the end of the year, and double investment services funds over the next three years.