HBOS shares surge on back of takeover buzz

Shares in Halifax Bank of Scotland closed 21% higher on London's FTSE index tonight amid hopes a rescue takeover by Lloyds TSB will go ahead as planned.

HBOS slumped 14% yesterday after fears the takeover deal could have to be repriced to satisfy Lloyds’ investors.

But in a stronger session for the London market, both banks were bolstered by support for the takeover deal from Prime Minister Gordon Brown, who is “confident” it will go ahead.

Lloyds TSB also rose more than 10%.

There remained a big gap between Lloyds TSB’s offer and the HBOS share price. Under the terms of the takeover, Lloyds is paying 0.83 of its own shares - currently equivalent to 207.5p – for each HBOS share, which closed at 148.1p.

Rival bank shares also firmed as investors looked ahead to the expected approval of a $700bn (€487bn) banking bail-out in the US tonight. Barclays added 4%, and First Direct owner HSBC 2%.

Gains for Royal Bank of Scotland were less than 1%.

The wider FTSE 100 Index ended the day up 1.2%, after even more impressive gains ebbed away in response to sizeable opening losses for Wall Street’s Dow Jones Industrial Average ahead of tonight’s crucial Senate vote on the rescue package. US shares were also depressed by some worse-than-expected US manufacturing data.

But US politicians appeared confident the rescue deal would pass, with Steny Hoyer, leader of the House Democrats, saying: “I think the Senate thinks it has the votes and I think it probably will pass.”

Before the package can be passed into law, it needs to be approved by both the Senate and the House of Representatives, where it was rejected on Monday.

Concerns that the Lloyds TSB-HBOS deal might have to be repriced arose due to the difference between the Lloyds offer figure and HBOS’s share price.

The gap has been seen as an indication that 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.”

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

Overnight inter-bank rates eased back from yesterday’s highs following the latest efforts by the Bank to relieve pressure on banks.

The Bank today pumped in an extra $30bn (€31.4bn) of liquidity – available for one week – which comes on top of $40bn (€28.5bn) injected since last Friday as banks scared of losses hoard cash.

The Bank of England said it was continuing “to monitor money market conditions closely” as it made its latest funds injection.

Today saw the overnight sterling inter-bank rate fall back sharply by almost 2% to 4.96% – below the Bank’s official 5% base rate – while dollar and euro borrowing costs were also lower.

But the three-month inter-bank rate – a key rate in setting mortgage costs - crept higher again with banks still reluctant to lend to each other for longer terms. This has prompted a raft of lenders to hike rates in recent weeks.