Lloyds gets HBOS for a song

By Edward Harrison On Sep 17, 2008

Lloyds TSB has announced that it will buy rival HBOS for 232 pence a share. Back in May 2007, just over a year ago, HBOS shares were trading for almost £17 each. However, HBOS closed trading today at £1.47, sustaining a loss of over 90% in 16 months time.

While HBOS is often touted as the largest mortgage lender in the UK, its shareholders should feel lucky to have escaped a Northern Rock or Lehman-style failure in the wake of the company shares’ abrupt selloff.

British bank Lloyds TSB has agreed to buy rival HBOS Plc to create a 28 billion pound ($50 billion) mortgage company, a person familiar with the matter said on Wednesday, making it the latest troubled bank to be forced into the arms of a better-funded rival.

HBOS, Britain’s biggest home loan lender, will be bought for 232 pence per share in an all-share deal, valuing it at over 12 billion pounds, the source said.

The deal is expected to be formally unveiled on Thursday.

HBOS had said earlier on Wednesday it was in “advanced talks” with Lloyds after its shares were battered for a sixth consecutive day on mounting fears about its funding position. Its shares still fell 19 percent on Wednesday to 147.1 pence,

A takeover will mark another chapter in a dramatic shake-up of the global financial landscape as firms with weaker balance sheets or funding strains are swallowed by stronger rivals, with deals encouraged by authorities worried about a wider meltdown.

Prime Minister Gordon Brown was involved in negotiating Lloyds’ deal for HBOS, the BBC said.

Alistair Darling, UK finance minister, said before the deal was sealed that the government was “keeping very closely in touch” and he expected commercial negotiations between the two banks to go on into the night.

–Reuters

The fact that government were so involved in the negotiations makes clear how important it was that this deal get done. It appears to have been the best outcome for all parties concerned: HBOS, Lloyds and Labour. The British Government has been pilloried for having squandered the good times and leading the UK into a major downturn with no room for fiscal stimulus. Both Gordon Brown and Alistair Darling should be worried about getting the sack. The last thing either they or the Labour Party needed was a failure of an institution like HBOS. HBOS was too big to fail.

The HBOS crisis was a perfect example of how liquidity concerns become intertwined with solvency issues in a time of panic. With the HBOS crisis now at an end, one wonders whether RBS will come under attack next, or whether we can breathe a sigh of relief until the next round of writedowns or share price losses. We will have to wait and see.