Halifax to issue preference shares

HALIFAX, Britain's largest mortgage lender, will issue preference shares next spring to finance part of the pounds 750m acquisition of the Birmingham Midshires Building Society that it announced last week.

The issue will be the first in a series designed to reduce the bank's cost of capital and improve its returns - and which could involve returning up to pounds 5bn in cash to holders of common shares.

"If you are increasing the number of preference shares then by definition you're increasing your capital and capital has to be managed,'' Roger Boyes, the financial director, said in an interview. "The one links with the other."

The bank will sell its first batch of preference shares to help meet the cost of buying Birmingham Midshires. It needs to pay members of less than two years in shares, and will use preference shares.

Analysts said that the bank may choose to sell preference shares, return the proceeds to shareholders and increase its return on common shareholders' equity without weakening the capital base. If there are fewer common shares, the earnings per share would rise and - in theory - the value of the shares would rise as well.

"What we may look at is a proper capital restructuring to make it more long-term," said Gren Folwell, deputy chief executive, after a press conference to announce the Birmingham Midshires deal.

He said the plan may include selling preference shares, which pay a fixed dividend. But because they carry a lower risk for the shareholder than common shares, the dividends tend to be lower and so cheaper for the bank.

"If you're doing a straight replacement [of common shares] it means you can buy back more shares more quickly and you can increase your return on equity," said Michael Trippitt, an analyst at Schroders Securities.

Halifax converted from building society status last June.

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