Market turmoil adds new twist to ABN Amro battle

The shockwaves resounding around world markets may have seen a host of corporate deals shelved, but the turmoil could yet be decisive in the outcome of the world’s biggest banking takeover.

Since April, Barclays and a Royal Bank of Scotland-led consortium have been battling to land Dutch bank ABN Amro in a deal set to create the world’s fifth largest banking group.

But with financial stocks falling in the stock market amid a credit crunch and fears over exposure to sub-prime mortgage losses, analysts now believe that the RBS team’s higher €71.1bn offer is now the firm favourite to win the support of ABN’s shareholders, especially as 93% of the bid is in cash.

This latest bout of market turmoil could not have come at a worse time for Barclays. The bank was flying high less than a month ago after unveiling the China Development Bank and Singaporean investment fund Temasek as major shareholders in a €3.6bn investment.

The funding deal allowed them to close the gap on RBS’s bid in terms of its higher 37% cash element and lift the overall value of the bid to €67.5bn – while talking up the strategic long-term potential of the merged Barclays-ABN business in China.

But the market upheaval since then has knocked around €4bn off the value of the Barclays bid since it unveiled its offer on July 23.

Barclays’ share price is now trading around the 620-630p mark – well off its year high of 790p, and significantly below the 738p reached after the bank revealed its new Asian investors.

Analysts calculated that Barclays’ share price would have to reach 800p before reaching parity with the RBS bid, but the latest developments could have put the final nail in the coffin, according to observers of the battle.

Collins Stewart banking analyst Alex Potter said: “Since Barclays’ bid is mostly paper, and the Barclays share price has fallen, so does its value – and the same does not apply for the RBS bid.

“The consortium’s cash is coming from their own balance sheets and rights issues, and underwritten by Merrill Lynch in any case.”

The rival RBS team, which includes Spain’s Santander and Belgo-Dutch bank Fortis, is now sitting pretty after the deal and necessary rights issues were given the green light by shareholders.

Fortis backed the move despite reported comments from ABN chief executive Rijkman Groenink – later denied – that its shareholders should vote against the rights issue to maintain the Fortis share price.

The “intervention” fuelled suspicions that ABN’s top brass is much keener for Barclays’ approach to succeed despite protestations of even-handedness and failing to recommend its latest offer with a higher bid on the table.

Howard Wheeldon, senior strategist with BGC Partners, has been a strong proponent of the strategic rationale behind a merger between ABN and Barclays since the pair first confirmed discussions in March, but now admits RBS is the far more likely victor.

He said: “A Barclays deal makes sense first and foremost from a cultural point of view, because if you have the backing of the ABN Amro management they will work together to make it happen.

“Carving up the group would cause huge friction in what is left of ABN.”

But he added: “There is a line that Barclays cannot go beyond with its own shareholders in terms of risk. In reality only the regulator stands between RBS and ABN Amro.”

Barclays’ bid received its own approval from Dutch regulators this week when the company received a declaration of no objection (DNO) from the Dutch Ministry of Finance over its offer.

While the RBS-led team also remains confident of the green light from Dutch regulators, it has taken advantage of the current pressure on financial stocks to bolster its cause.

The consortium has boosted its stake in ABN to 3.25% after buying nearly 41 million shares at €33.81, well below its €38.40 a share offer price.

ABN is now valued in the market at around €64.4bn, but some analysts are wondering whether the consortium – as an overwhelming favourite to land the deal – now risks paying too much.

There is the potential uncertainty over the Dutch bank’s possible exposure to sub-prime mortgage losses after a host of other European banks, including BNP Paribas, Deutsche Postbank and Germany’s IKB all admitted major hits from their investments.

According to Sandy Chen, a banking analyst at stockbroker Panmure Gordon, there is a risk for whoever wins ABN due to the Dutch bank’s heavy exposure in the asset-backed commercial paper (ABCP) market.

Banks can raise money for themselves and their clients through “conduit” companies containing asset-backed securities, such as the mortgage-based bonds which have fallen out of favour with the market.

The sponsoring banks sell ABCP based on the securities in the conduits, but in the current climate a more suspicious market will not buy the paper – seeking more tangible assets. The value of the conduit’s assets shrinks.

The assets, which were funded by the sale of paper, now have to be funded from the bank’s own balance sheets. Banks are unable to “roll over”, or refinance, the conduits because the markets do not trust the paper.

Mr Chen estimates that ABN has an exposure of $55bn (€41bn) as a leading European sponsor of ABCP, which he describes as a “core asset class” for banks. Barclays could itself be exposed to the tune of £25bn (€37bn), RBS less so at £11bn (€16bn).

The uncertainty over the Dutch bank’s potential exposure should give some food for thought to Barclays shareholders who must vote to approve the bid on September 14.

ABN’s shareholders will discuss both offers at a meeting in Rotterdam six days later on September 20.

Although RBS’s bid grows more likely to triumph as this hard-fought bout draws nearer the final round, in the fall-out from the current market turbulence both sides may well wonder whether the prize is everything it seems.