Bank of Ireland unlikely to pull off Abbey National takeover, say analysts

BANK OF IRELAND'S chances of taking over Britain's sixth biggest bank, Abbey National, has little likelihood of success, according to stockbrokers Merrion Capital.

Bank of Ireland chief executive Mike Soden could be galloping the company towards a second fall in the takeover stakes, if stockbrokers Merrion Capital's initial reaction to the proposed 21 billion euro merger proves true.

If the deal went ahead it would create the 12th largest bank in Europe.

Bank of Ireland's attempted merger with British bank Alliance & Leicester three years ago fell at the final hurdle, after disagreements over who would lead the enlarged group.

This time Bank of Ireland laid its cards on the table from the start any merged entity would have its headquarters in Dublin and its primary stock exchange listing in London.

Merrion Capital banking analyst Seamus Murphy said he holds out little hope of a deal being completed with Abbey National for three main reasons.

The cost savings, at first glance, do not appear significant. Assuming savings equivalent to 37% of Bank of Ireland's UK cost base are achieved, and capitalised at 9%, the value created from the deal would be around stg£2bn. Distributing this to both sets of shareholders at Friday's closing prices would add around 15% to both entities' market capitalisations. Merrion assume no revenue synergies.

Bank of Ireland's management team would most likely be split between Ireland and Britain. Merrion expect this would stretch the team's operational capabilities.

Bank of Ireland has a strong-growing franchise of operations in Ireland, and on the asset management side, while Abbey has a low-growth core retail franchise.

"Abbey is currently in a distressed position with further potential write-offs in its corporate book likely, its life business potentially needing further capital injections and its dividend under pressure. Therefore, if Bank of Ireland could turn this business around, it could be an attractive deal," Mr Murphy said.

"However, Bank of Ireland, at current levels, would be swapping a high-growth price earnings ratio bank at nine times 2003 earnings, for a seven times price earnings ratio bank for the prospect of cost savings in the low-growth UK mortgage market."

Goodbody Stockbrokers, owned by Bank of Ireland rival AIB Bank, said it was ambivalent about the deal.

"Abbey's retail business would appear highly attractive to Bank of Ireland and would bring significant scale benefits in the UK. Elements of Abbey's wholesale business, on the other hand, appear highly risky and not in line with Bank of Ireland's traditional core business," said Goodbody's Len Riddle.

"Combined with uncertainty over the timing of buying a European bancassurer in current markets, it is this latter point which could drive some weakness in Bank of Ireland's share price as an initial reaction to this announcement," he said.