The Royal Bank of Scotland has officially joined the fight for the control of UK banking giant National Westminster (NatWest), proposing a merger between the two companies.

It is the second bid for NatWest by a Scottish bank, and again the company pursuing the merger is a much smaller firm than NatWest itself.

However, Royal Bank's offer has already been rejected by NatWest's board.

In its fight to slim down and fend off hostile bidders, NatWest also announced an extra 5,000 job cuts, on top of 10,000 redundancies that were already on the cards.

Sir David Rowland, chairman of NatWest plc, said the "board considered that the proposal did not justify a recommendation from the board, and so we rejected the offer".

Speaking at a news conference on Sunday, Sir David said the merger proposal had been made on Friday evening and rejected during a full board meeting on Saturday.

He refused to comment on the size of the offer.

Newspaper reports over the weekend had suggested that Royal Bank was prepared to offer one of its own shares and 275 pence in cash for each NatWest share. This would value NatWest £26.7bn.

If successful, the merger would see a bank with a market capitalisation of £12bn and assets of £75bn in 1998 take over a bank with more than twice the market value and £186bn of assets.

Hostile bid imminent

Royal Bank of Scotland is now expected to launch a hostile bid for NatWest within the week.

The bank could either wait until Thursday, to make the offer on the back of its full-year results, which are expected to be very good.

NatWest's disclosure of the offer, though, could force Royal Bank to spell out the details of its plan as early as Monday.

Royal Bank's chief executive George Mathewson was said to be talking to his financial advisers during Sunday, to put the finishing touches to the take-over plan.

Bank of Scotland vs Royal Bank of Scotland

A string of poor results have made NatWest a prime take-over target.

The first bid had been made by yet another Scottish bank, Bank of Scotland (BoS).

This offer was raised on Friday by more than £3bn to £25.5bn.

Royal Bank of Scotland's bid is expected to beat the deal proposed by BoS.

Sir David said the new proposal "continues to undervalue NatWest and it has completely failed to address the risks. Shareholders should reject this revised offer."

Defensive moves

NatWest, meanwhile, has released its defence document rejecting Bank of Scotland's bid.

The bank's beleaguered management promises to achieve annual cost savings of £525m by 2002 - about half of the savings projected by BoS.

Shareholders are promised £1bn as part of a share buy-back scheme, and increased dividend payouts.

All this will be financed through the sell-off of debt markets group Greenwich NatWest, funds manager Gartmore, Ulster Bank and NatWest Equity partners and the closure of a further 200 branches.

Dramatic job cuts are part of the package and would reduce the staff of what remains of the company by 15,000 to 27,400. This is 5,000 more than previously announced.

Ron Sandler, Nat West's chief operating officer, said the merger proposals of the bank's Scottish rivals would fail to create the value and unlock the savings already owned by NatWest shareholders.

"It's very easy to stand on a soapbox and (promise) completely unrealistic savings and performance targets. These involve substantial risks," he said.