Britain's biggest building society, Halifax, dealt a body blow to SBC Warburg yesterday when it dropped the investment bank as its financial adviser and lead stockbroker for its pounds 10bn flotation on the stock market next year. The controversial decision will cost Warburg tens of millions of pounds in lost fees and savage its already wounded reputation in the City. Compensation for lost fees is considered unlikely.
Halifax, chaired by Jon Foulds, said its decision arose out of the "management relationship" with Warburg and a potential conflict of interest. The main reason behind the decision is Halifax's dissatisfaction with the new style of merchant banking at Warburg since its takeover last year by Swiss Bank Corporation.
The building society has become increasingly concerned about senior level departures in the advisory team that was acting on its behalf. "If it looks unstable at the top, that can become a cause for concern," a Halifax spokesperson said. Another said: "This is such a massive transaction that will take place over a long period. You need stable relationships."
There have been two senior departures which are thought to have led to Halifax's concern. Anthony Brook, the Warburg director who led the team on Halifax, left in December to join the rival investment bank BZW. Derek Higgs, one of Warburg's most senior executives, left earlier this year to join Prudential.
There have been expressions of concern elsewhere about the bank's approach to client relations, which are now much more product-driven, adopting SBC's American investment banking culture, rather than the relationship- style that made Warburg the envy of the City in its heyday. Halifax's decision follows the desertion of the bank by a long list of other clients, inlcuding Wessex Water, which dropped Warburg as its financial adviser ahead of its bid for South West Water this week. In addition, Boots and P&O have recently replaced Warburg as their stockbroker.
The haemorrhage of top clients is becoming a serious issue for the bank, whose corporate finance department is struggling, while the securities side is thriving on the merger. Halifax has replaced Warburg with Deutsche Morgan Grenfell as its financial adviser. Merrill Lynch, which was formerly joint broker with Warburg, has been elevated to joint broker while a second stockbroker is sought.
Warburg was saying little yesterday but did not attempt to hide its dismay at being booted off the Halifax team in such a prestigious stock market flotation. "We are clearly disappointed by this but we wish the Halifax every success in its flotation. In the meantime we are pleased to continue to work with them on other projects.
Warburg stressed that as well as the long list of client desertions, it had continued to win new business. It has been appointed by Kvaerner to advise on its pounds 900m takeover of Trafalgar House. The Swiss drugs giant Sandoz has appointed Warburg to advise on the sale of its speciality chemicals business.
Halifax stressed that the change in its advisers would have no impact on the planned timetable for its proposed conversion to bank status.