Bank shares soar in the UK over takeover hopes

Halifax Bank of Scotland’s shares surged ahead today amid a revival in confidence over its rescue takeover by Lloyds TSB.

HBOS was more than 31% higher after a slump yesterday triggered fears that the deal could have to be repriced to gain the green light from Lloyds’ investors.

But shares across the sector rose as investors looked ahead to the expected approval of a $700bn (€482bn) banking bail-out in the US tonight.

HBOS has also been bolstered by support from British Prime Minister Gordon Brown, who is “confident” the deal will go ahead.

And there were signs that frozen money markets had been helped by the Bank of England’s efforts to pump in billions extra for nervous banks.

Under the terms of the takeover, Lloyds TSB is paying 0.83 of its own shares - currently equivalent to 215p – for each HBOS share, which is trading at around 160p.

The wide gap between these two figures implies the market is dubious about the prospects of a deal at the current price, as Lloyds TSB shareholders, who have to approve the takeover, may not be keen to pay such a big premium for struggling HBOS.

But a note from analysts at Credit Suisse today played down the difference, and highlighted the interests of institutional investors with stakes in both banks in securing a deal.

Credit Suisse said: “We think there’s a danger people read too much into the discount. Unlike a ’normal deal’, the potential downside in HBOS shares in the event the transaction doesn’t proceed might be very significant. And so a relatively small risk of failure translates to a large discount.

“Not only is there considerable regulatory and political pressure to get this deal done, but there are considerable cross- shareholdings between the banks.”

Investors including Barclays, Aviva, L&G, M&G and Standard Life all have stakes of more than 1% in both companies.

David Buik of BGC Partners added: “Perhaps the price may be altered ... but the deal must stand. Failure to consummate would be viewed as horrific for the market.”

The wider FTSE 100 Index was also up 1.5%, buoyed by commodity stocks such as oil and mining firms, as the hopes of a US financial rescue staved off fears of a demand slump in a global economic meltdown.