Banking takeover bonanza

By ANDREW OXLADE, COLUMNIST
Updated:

 

HOPES that a rival bank may swoop to take over Alliance & Leicester with a generous bid has pushed the shares 10% higher this year. But according to some experts, there may be another 12% gain to come.

The prospect of A&L finally losing its five-year takeover protection - a privilege extended to all converting building societies - has inspired a particularly sharp rise in the shares in recent weeks. A&L's protection officially ends on 21 April.

Aggressive bids are often pitched at a premium to the share price to ensure shareholders will accept. Mark Thomas, a banking analyst at broker Fox-Pitt, Kelton suggests an offer could be up to £10 a share - a 12% mark-up on the current price of 885p.

Not everyone is convinced a bid is on the cards. 'Ironically, the higher the shares rise because of bid speculation, the less likely a bid will be,' says James Leal, banking analyst at broker Gerrard. 'If the shares were 700p, someone might be tempted, but not at these levels.'

Bid speculation has circled A&L since it demutualised. Even during its protected period, the bank could still have agreed to a friendly merger - and almost did with Bank of Ireland in 1999. But it has been the past 18 months that has seen the rumour mill move into overdrive. And the shares have rocketed 40%.

The most likely predators are Abbey National and Lloyds TSB. Growth is set to slow at both companies, so big City investors want them to buy a new company that can help cut costs, by merging operations, and offer areas of expansion.

Royal Bank of Scotland could also stake a claim, but it swallowed NatWest only three years ago and is less desperate than the others to find a new acquisition. However, analysts believe RBS would be able to muster the highest offer. Other suspects include National Australia Bank, Bank of Ireland, Barclays and Allied Irish Banks.

Analysts are divided on whether a bid will materialise. FPK's Thomas believes a bid is highly likely because A&L has been badly managed. The company has failed to deliver consistently good results and therefore failed to give shareholders value for money. Therefore, says Thomas, the management would struggle to convince investors they shouldn't sell out for a quick buck.

One way an offer might be blocked could be on competition grounds. The Competition Commission blocked Lloyds' attempt to gobble up Abbey because they are the third and sixth largest banks and both have national branch networks.

Competition would be less of an issue with an A&L takeover, says Mike Stubbs of Royal & Sun Alliance Investments because the focus would be more on share of the mortgage market rather than branch networks. He expects a bid but believes the stock may be running ahead of the story. 'A takoever is less likely than the market is pricing in,' he adds.

According to market information provider Multex, most analysts are cautious on A&L shares. More than half recommend holding while 18% say buy and 27% advise dumping the stock.

But A&L is not the only former mutual to lose its protection this year. Northern Rock, the specialist mortgage bank, is fair game from 1 October. But analysts say there will be less predators than for A&L. That's because Northern Rock's management has impressed shareholders.

'It is probably the most efficient, leanest bank in Europe,' says Gerrard's Leal. Improving profits have driven a 25% rally in the shares in the past year. A hostile bidder would therefore have difficulty convincing shareholders to sell out, making a bid less likely.

Plus the former building society set up the Northern Rock Foundation which takes 5% of the bank's profits for good causes, mainly in the North-East. Any bidder would have to pay off the foundation, slapping anything up to a 10% premium on the price tag.

So with little prospect of bids and an increased chance that the property market - and therefore the mortgage market - will cool this year, Northern Rock's run may be coming to an end. That said, 55% of analysts still recommend buying the stock and most of the rest say hold.

Mike Stubbs says a bid may not emerge this year to drive up the price, but it will arrive eventually. He adds: 'All the small mortgage banks will disappear in the long-term.'

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