Lloyds TSB Takeover of HBOS for £12 billion, £2.32 per share

By: Nadeem_Walayat

In a morning press statement Lloyds TSB confirmed its accepted bid for Halifax Bank of Scotland (HBOS) formerly Britain's biggest mortgage bank for £12 billion ($21 billion) or £2.32 pence per share in a all stock deal, following yesterday morning near collapse in the share price of HBOS which had witnessed a sustained assault by hedge fund speculators over 3 days that had wiped out more than 66% of the banks value from £2.85 last Friday to just 90p Wednesday morning, following on from the weekends Lehman's bankruptcy and AIG nationalisation.

The HBOS shares last traded at just £1.40 before the statement, and therefore the price of £2.32 represents a 65% premium over the decimated market price. Despite the higher price, this still represents a bargain basement price paid for HBOS for a bank that a year ago was worth more than £70 billion, coupled with the fact that under any other circumstances the bid would have been blocked due to competition concerns, which prompted the UK government to issue an "intervention notice in the proposed merger of HBOS and Lloyds TSB on public interest grounds to ensure the stability of the U.K. financial system".

After huge losses to shaereholders that have lost 75% of their capital over the year, the next group to be hit will be the hardest will be the staff of HBOS where an estimated 50% will now lose their jobs over the next 12 months, yesterdays article Hedge Funds Crash Halifax, HBOS Rescued by Lloyds TSB discussed this and the implications for savers, mortgage holders, and the UK markets as below -

Implications for the Global Financial System

How many could have imagined a year ago that the Halifax would be brought to its knees, literally hours away from being tipped over the edge into nationalisation, the answer is NO ONE!. Today's HBOS near collapse is but just another card in the crumbling house of financial cards as we are literally witnessing a global financial meltdown as capital devastated banks now teeter and one by one get pushed over the edge of the credit crisis cliff. As each bank fails it sends out a ripple of defaults across the global financial system. Like a chain reaction in a nuclear reactor in meltdown. Lehman's collapse, closely followed by the nationalisation of the worlds biggest insurance company AIG, does appear to be literally exploding right before as the financial markets are now clearly in the grip of systemic distrust, where financial institutions are unwilling to transact business with one another for fear of counter party default. This implies a flight to safety to traditional safe havens such as gold and the other precious metals as well as short-end Treasury bonds.

Stock holders the world over are wondering which way will their capital be destroyed ? Will it be through bankruptcy or through nationalisation? In such a climate all stocks get dumped, after all if the likes of Lehman, AIG and now HBOS can be toppled then there literally is no safe stock to hold!, hence shares are again today being dumped as elaborated on in the analysis of 9th September - BANKRUPT Banks Wiped Out by Tulip Backed Securities.

Implications for UK Stock and Futures Markets

This may prove to be the straw that broke the camels back, and the UK government may follow the United States earlier decision to highly regulate short selling in key financial stocks. The aim of which is not to prevent long-term trends, but to give a company breathing space to investigate options such as a takeover or re-financing which is much more difficult to do in the face of relentless short selling. Whether the government takes action on this depends on how much profits the hedge funds have made on the HBOS collapse which will become apparent in the coming months. As mentioned earlier, the Treasury and FSA had voiced concerns in March when HBOS was first targeted, but to date nothing has emerged with regards short-selling regulation.

My view - Under the current credit crisis circumstances, the UK government should follow the US example as it will have the effect of decreasing pressure on distressed banks, giving the banks officers valuable days if not weeks for a better more favorable outcome, than shot gun weddings amidst blind panic meltdowns.

Implications for Savers

As I stated on the 15th September specifically with regards HBOS, that small savers have little to fear as the government would not allow any loss to small HBOS savers under any circumstances for fear of igniting a run on the bank. However the rules of the game for savers remain as follows -

Currently UK savings are secured at £35,000 at 100%, this is proposed to rise by the end of this year to the first £50,000 at 100%. However as the Northern Rock example illustrated that the Government was prepared to step in and guarantee ALL savings at 100%, and therefore giving an unequivocal guarantee to savers so as to bring the Northern Rock bank run to a halt. Similarly should other retail banks such as HBOS fall over the edge of the credit crisis cliff, then similarly the expectations are for 100% security for all savers. However savers should take note of the difference between a high street retail bank such as HBOS and an Investment bank such as Lehman Brothers, therefore ensure that they definitely do limit exposure to non retail banks to £35,000.

Implications for Mortgage Holders

Whilst the bank has not been nationalised, however the outcome will be similar in that Lloyds TSB will be looking to reduce its exposure to the UK housing market so as to concentrate on the core profitable arms of the bank. Therefore the expectations are for HBOS mortgage interest rates to rise significantly as the bank seeks to push mortgage holders to remortgage into the arms of other mortgage banks and therefore reduce its risks of default further down the line as the UK housing bear market enters its second year.

Implications for HBOS Staff

HBOS staff should be under no illusion, this is NOT a merger it is a TAKEOVER of a greatly weakened bank by Lloyds TSB. Therefore HBOS jobs are at serious and near imminent risk as the HBOS mortgage book contracts so will the need for the vast branch network, therefore the expectations are for huge job losses amongst the banks 72,000 workforce which is more than 12 times that of Northern Rocks original workforce of 6,000 that has subsequently shrunk to less than 4,000 or a loss of over 33%. In actual fact the expectations are that over the next 12 months the HBOS workforce will fall by a much larger degree, probably in the region of 50%.

Implications for Lloyds TSB

Apparently LLoyds TSB is getting a bargain, as one of Britain's strongest and conservative banks takeover a basically bankrupt HBOS at bargain basement prices. However do Lloyds realise that the housing bear market is far from over ? Lloyds own profits will slump but what of the HBOS's exploding mortgage book? It's too early to tell, but Lloyds TSB may come to regret its decision to takeover HBOS.

Implications for the UK Housing Market

HBOS is the corner stone of the UK housing market, for the bank to be under such distress is a clear sign that the UK housing market crash of Summer 2008 is set to continue for the rest of the year. My existing trend forecast for a fall of 15% over 2 years as of August 2007 has been exceeded by a significant degree as a consequence of which an update is now pending to cover the UK housing market trend for the next 2 years in the face of global deleveraging of asset prices as bankrupt banks are forced to liquidate assets and the deep ensuing economic recession.

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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