Private Investor: Don't ever bank on an A&L takeover

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The Independent Online

One thing I've managed to learn in the few years I've been dabbling in the stock market is to ignore bid rumours about Alliance & Leicester. A couple of years ago, there were apparently reliable reports that Crédit Agricole was going to take A&L out for anything up to £15 a share. I bought in at £12 and sold for about the same amount, if memory serves, after nothing materialised in a year.

Since then, National Australia Bank and Santander have been punted around as possible suitors, again with no action following up the breathless reports in the press. Last Sunday it was Lloyds TSB's turn to be in the frame for a possible bid. That "news" seemed to fade as quickly as it was announced, only to be followed a few days later by more gossip about Standard Chartered being ready to pounce. Get the picture?

Admittedly the shares are cheap – the yield, at 9.3 per cent, is rather more than you'd get on one of their deposit accounts – but only if they manage to keep up the dividend. You have to wonder about that. I fully accept that, unlike Northern Rock, A&L was never so reliant on wholesale funds, and that after the credit crunch started to make its presence felt, A&L also arranged some credit lines, so that its funding is protected, for a while at least. However, I don't know how much that secure credit from banking's bigger boys is going to cost A&L. The odds must be that it will be more expensive than the money markets were this time last year, and that will have a predictably depressing effect on margins and profitability.

I also notice that the mortgage bank is offering staff voluntary redundancy, which is rarely a sign of rude financial health. I would ignore the stories about imminent takeover and ignore the shares too.

It's all a bit of a shame, really, especially since Leicester is my home town and I was once a member of the Leicester Building Society, so I'm sentimental about it. Despite the windfall gain of shares, which I cashed in fairly quickly, I was more than a little sorry when it floated on the stock market. You did wonder what institutions the size of A&L, Bradford & Bingley and – yes – Northern Rock were doing out there, and could see the end of their independence coming, though in the case of the Rock not the spectacular finale that we saw last year. Even the mighty Halifax and Woolwich got gobbled up.

If the recent crunch proves anything, it must be the benefits of mutuality. Not to the exclusion of all else, but as a valuable part of the financial ecosystem. Some of the smaller societies seem to pay their directors rather too much relative to the size and riskiness of the business (an issue the Building Societies Association and the Financial Services Authority might be wise to look at before it becomes an even bigger scandal than it is). However, by and large, the Northern Rock debacle, and the continuing doubts about A&L and Bradford & Bingley, must be making the likes of the Nationwide very smug indeed.

I can't blame them. Maybe one day Northern Rock will be denationalised and reconstituted as a mutual – ie a building society – once again, owned by its members. It would be a neat solution. You might want to open an account at Northern Rock simply to register your early, fanciful interest in becoming a member one day. Mind you, I don't think they'll want to float on the stock market ever again.

One share that might be worth dipping into is British Airways. I can well see why the stock is languishing now. High oil prices, a slowdown in consumer spending, strikes, the uncertainties of whatever hash BAA may make of Heathrow, those crazy protesters, the ever present threat of terror: it can all turn an investor off. Yet long term I still think travel and leisure is a good "story" and BA a strong player. Plus – and here's my immediate point – if you own 200 shares you get a 10 per cent shareholders' discount on flights. Usually you oughtn't to buy shares just for the perks, but this might be one you could justify, given how much they've fallen recently. In other words, at £1,000-plus the discount might not have been worth going for; at £550 (now) it could be a good idea, taking a medium-term view. Just a thought.

s.ogrady@independent.co.uk

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