Ambitious bid for Abbey may bring on takeover of BoI itself

BANK OF IRELAND'S proposed merger with British bank Abbey National plc is one of the most ambitious in Irish corporate history.

However, a week after the merger proposal was dismissed by the Abbey National board, we believe Bank of Ireland’s courtship is waning. The reduced possibility of a deal is, in fact, pushing Bank of Ireland’s (BoI’s) share price up.

Sadly for Bank of Ireland management, the fight for Abbey may have been lost before they even donned their gloves.

Abbey National’s public profile was as weak as a suitor could hope. The English bank had no a chief executive officer. Its most recent corporate history was replete with disasters. And its share price was at a seven-year low.

It should not have been difficult to convince one of the most disgruntled sets of shareholders in the UK banking sector that they should seriously consider an offer worth up to £8.05 per share when Abbey was trading at just over £5.

When it was first mooted Abbey management dismissed the deal out of hand. BOI was on the back foot when they failed to immediately release details of their merger proposal. On Monday October 7, Bank of Ireland could have grabbed the initiative from the Abbey board by hitting the market with a details of BoI’s proposed Abbey buy. But it didn’t.

Nearly a month has passed since Bank of Ireland’s initial approach to Abbey National was made. Abbey’s share price fell from £6.28 to £5 before the merger offer was leaked to the media last Sunday week. But speculation about the bid has pushed the Abbey share price to over £6.70. Now Bank of Ireland’s offer does not look as appealing as it did when the share price was just over £5.

Leaks to the press are a common feature of takeover/mergers. Abbey management and Bank of Ireland reacted swiftly when the rumours became public and both parties issued statements.

Unfortunately, in our opinion, Bank of Ireland should have been prepared for the possibility of their approach being made public when it least suited them.

Predatory banking deals are notoriously difficult to instigate, leaving Bank of Ireland little room to progress the discussions with Abbey. We feel that Bank of Ireland’s approach to Abbey is effectively over unless a higher offer can be put in place. We don’t expect this to happen unless Bank of Ireland can get a good look at the Abbey accounts.

Importantly, with another failed deal in its lap, the strength of BOI’s management team could be under scrutiny. Michael Soden has been the Irish bank’s CEO for just nine months but already has the failed AIB merger on his record.

The Abbey approach highlights two opposing viewpoints in the market:

Is Mr Soden desperate to do a significant deal to clearly redefine Bank of Ireland’s medium-term strategy? He is attempting to protect BOI from an otherwise inevitable takeover of its healthy regional franchise by UK or European predators. The proposed merger of BoI’s and AIB’s back office IT functions has been blocked, leaving Soden with very limited options for expansion in Ireland. Having gone out strong with a Dublin HQ strategy and takeover talk, Soden could end up backtracking BOI into a less favourable deal with Abbey if he believes the options for expansion are so limited. The credibility of BoI management will be questioned if the Abbey deal turns out to be a non-runner due to the size of the fund raiser involved.

By highlighting the limited options BoI has in deal making, the bank leaves itself open to a takeover itself. With a weakened profile, clearing the decks for a takeover is the only alternative.

Soden is making a bold move to enlarge BoI. He has used a combination of excellent timing and BOI’s good management track record to tempt Abbey’s disgruntled shareholders. The incentive for Abbey shareholders will be large but not when viewed from the perspective of having a much stronger combined group. If he succeeds in the deal, the result will be cost savings and bulking up the Irish bank into a heavyweight growth bank with a possible FTSE-100 listing. BOI can use its PER premium to Abbey to complete the earnings-enhancing deal. If the Abbey deal fails, Soden’s ambitions have been demonstrated to the market. Soden broadens the potential growth of BOI and another possible deal is on the way. He has broken ground in publicly highlighting the logic of an AIB merger, attempting a clever swing at taking over Abbey National and he could be a preparing for a more attainable target such as Bradford & Bingley, the English finance-and-property-services company.

In our opinion, if the Abbey deal fails, BOI has forced investors to make a call on the bank’s future. Several questions must be reviewed. Is the realisation that BOI growth in Ireland is limited pushing Bank of Ireland management to make an unrealistic approach to Abbey? By highlighting its limited expansion options has BoI’s own vulnerability to takeover increased after a failed Abbey approach?

If BOI had made a similar take-over approach to Bradford & Bingley would the market be more appreciative of a sound expansion strategy? Will management credibility suffer in the aftermath of a failed Abbey approach, given the impact of the Alliance & Leicester deal three years ago?

We have bought Bank of Ireland for both our Trading fund and Intrinsic Value fund in recent days and are keenly anticipating the final chapter of Abbey/Bank of Ireland merger proposal.