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Boardroom cull will follow NatWest deal with L&G

Legal & General wins lion's share of board posts in NatWest takeover Norwich Union shares surge on speculation it will be next insurer to go Stock Exchange investigates 10% rise in L&G shares ahead of deal
A SERIES of top level departures is likely to follow at NatWest, the high street bank, if as expected, David Prosser, the chief executive of Legal & General, emerges in the all-important position as head of NatWest's retail business when the pounds 10bn plus takeover of the life insurer is unveiled on Monday.

The most prominent casualty is understood to be Martin Gray, the head of retail banking at NatWest, who will have to make way for Mr Prosser.

Paul Myners, the head of Gartmore, the fund management group which NatWest acquired, is also likely to step aside in favour of David Rough, L&G's head of investment, giving L&G the lion's share of key board posts.

Mr Prosser will take responsibility for retail strategy and integrating the banking and insurance sales forces of the two groups, and their IT operations. Derek Wanless, the NatWest chief executive, will retain prime responsibility for group and corporate broader management issues.

Sir David Rowland, the NatWest chairman who initiated the talks several weeks ago, will remain in his post, as will Richard Delbridge, the NatWest finance director. Bankers said that Sir David, who replaced Lord Alexander at NatWest six months ago, was crucial in making the deal happen.

"He is untainted by the past. That freed him to take what is a very bold move," said one.

The boards of the two groups are to meet over the weekend with the aim of having a deal ready to be announced on Monday morning.

However, while senior management positions have been agreed, sources fear there could still be some haggling on price, particularly given the relative movements in the share prices since news of the deal leaked on Thursday. There is also concern about whether all the management issues can be resolved before next week. Said one analyst yesterday: "There is bound to be some management friction." Said another: "There is going to be a lot of politics." Institutional soundings suggested that while some of L&G's shareholders might have hoped for 225p, most were were broadly happy with the price of 200p-plus being talked about, although the final verdict will be reserved until NatWest is ready to come clean about the precise mix of cash and shares.

Mr Wanless and Mr Prosser are likely to stress the huge potential for increasing sales in L&G products that will come from yoking L&G's low- cost operations and high-quality product range with NatWest's extensive branch network.

By putting Mr Prosser in charge of the retail operation NatWest also wants to make sure that the strengths of L&G will not be watered down by NatWest's more staid branch-banking culture. Mr Prosser has demanded assurances that he has the full backing of senior management in seeking to ensure that attempts to revamp NatWest's retail operations will not be frustrated by traditionalists defending their fiefdoms within the bank.

The deal has been broadly welcomed in the City as a necessary step in the fast consolidating retail financial services market. However, there was concern that NatWest shareholders were being asked to pay a high price for a deal which made good strategic sense but was more problematic financially. While L&G shares jumped another 9 per cent to 205.25p yesterday, NatWest shares fell back 68p to 1,143p.

Bob Yates, analyst at Fox-Pitt Kelton, the stockbroker, said yesterday that the deal would destroy value. He added: "This deal would not solve NatWest's real strategic problem of needing to find a substantial banking partner which will ensure substantial and ongoing synergies to boost its below-average return on equity. In itself the deal will destroy value whilst adding little to earnings and we expect the share price will weaken further."

He said that he reckoned there was around pounds 70m of cost savings to be made by merging the two life businesses.

Analysts believe NatWest is likely to seek to pay for the deal on the basis of 60 per cent new equity and 40 per cent debt. Yesterday's share price fall means that NatWest is likely to have to offer more shares to L&G's shareholders than it anticipated earlier in the week.

Bankers discounted talk of counterbids despite widespread market speculation.

There was talk of counterbids from such quarters as Aegon, the Dutch insurer that has been openly talking about acquiring UK life operations in the UK. HSBC, which is also keen to grow its life and pensions side in the UK, was also mentioned as a candidate yesterday.

However, bankers said NatWest would be keen to ensure that it is satisfied the price was pitched high enough to deter potential gatecrashers.

"Inevitably, if someone is prepared to pay silly money then they could get it, but they would have to make do without David Prosser," said one banker yesterday.

Matthew Wright, insurance analyst at Daiwa, said yesterday: "At two times embedded value it is not cheap."

Shares in Norwich Union soared 11 per cent to 474.5p on speculation that it would reconsider its commitment to remaining independent.

The group has long been in the sights of Axa, the insurance giant which swallowed up Guardian Royal Exchange earlier this year. However, Barclays, which recently held a party to celebrate 100 years of co-operation with Norwich Union, has long been close to the insurer and would be in a strong position if Richard Harvey, its chief executive, were to decide it was time to seek a merger partner.

Meanwhile, he Stock Exchange yesterday launched an investigation into the abnormally high level of activity in L&G shares on Thursday afternoon. L&G stock rose more than 10 per cent, with more than 41 million shares changing hands - more than three times the normal average daily volume. It was that abnormal activity which prompted NatWest and L&G to put out yesterday's statement confirming talks.

Outlook, page 21