Abbey rejects Lloyds bid

No love: Abbey National asks suitor to go away

Abbey National has refused to enter talks with its unwelcome suitor Lloyds TSB, dismissing the takeover proposal from its bigger rival as too low.

Abbey says it prefers to continue merger talks with Bank of Scotland.

Lloyds TSB had sent a letter to Abbey National on Tuesday, proposing a "combination" - either takeover or merger - of the two firms.

The black horse's charm failed to impress

A merger would create the second biggest banking group in the UK, with a value of £53bn and a cost savings potential of about £700m per year.

Yet, after less than two days of deliberations, Abbey's board rejected the proposal.

Rejection

"The board has concluded that the proposals contained in the letter are unattractive and accordingly it does not intend to enter into discussions with Lloyds TSB," Abbey said in a statement.

All these deals are predicated on [unattractive] paper for [unattractive] paper. I don't want paper, I want cash

UK Fund Manager

In particular, Abbey believes that the price offered by Lloyds is too low and the combination of the two banks is unattractive, according to an industry source.

Banking sector analysts have estimated that Lloyds TSB could offer up to £13.50 per share for Abbey National, well above its £11.18 market value on Thursday.

The bid would have valued the bank at about £19bn.

Fund managers disapprove

But most fund managers believe the Lloyds TSB offer would be paid for with shares rather than with cash.

And regardless of the potential cost savings; many analysts fail to see a potential for significant revenue growth from a combination of the two banks.

So a Lloyds-Abbey deal would fail to excite them, and the same goes for the ongoing merger talks between Abbey and Bank of Scotland which could be a nil-premium merger of equals.

"All these deals are predicated on [unattractive] paper for [unattractive] paper. I don't want paper, I want cash," said one fund manager.

"None of these deals are scintilating," said another fund manager who holds shares in all three banks.

No hostile bid

Lloyds TSB had said it would not make a hostile takeover bid, but some analysts believed the bank will do so anyway because it is anxious not to miss out on the recent spate of bank mergers in the UK.

Some analysts believe such a bid could prove problematic with the regulators who might object to the increased market power a Lloyds-Abbey combination would be able to wield.

However, such a deal would offer a better chance of cost savings than a merger between Abbey and Bank of Scotland, according to Hilary Cook, analyst, Barclays Stockbrokers.

Much of the cost savings would be derived from the removal of business areas where the two banks overlap, however, and this could have resulted in up to 30,000 job losses - a situation that would have added to the controversy surrounding such a deal.

Abbey National's share price fell just under 1% and Lloyds TSB shares rose about 2% following the news of Abbey's rejection. Bank of Scotland's share price rose 6.5%.