Bank of Ireland closes in on Abbey deal after NAB pulls out

Abbey National yesterday looked increasingly like it might become enveloped in a bear hug by its smaller suitor, Bank of Ireland, as the other company in the running to buy Abbey, National Australia Bank, pulled out.

NAB, run by Frank Cicutto, said it had approached Abbey three weeks ago, after its initial offer for Britain's sixth-biggest bank was rejected in the summer. The Australian bank added: "The discussions regarding the National's proposal did not result in any agreement and have now ceased."

Abbey discussed NAB's latest approach in a board meeting on Monday, along with the informal offer it has also received from Bank of Ireland.

Its board rejected both proposals because it wants to push ahead with appointing a new chief executive to turn the struggling business around.

NAB's deal was structured as a takeover of Abbey, with estimated annual cost savings of £300m in order to offer Abbey shareholders a substantial premium to the £6.50 Abbey's shares were trading at a few weeks ago.

NAB has not ruled out returning to the table, but is understood to be unwilling to raise the price or make a formal offer without having the chance to do due diligence on Abbey's business.

NAB is concerned about Abbey's wholesale business, which emerged earlier this year to have suffered bad debts and under-reserving.

Meanwhile Bank of Ireland is working around the clock to publish more details of its own offer tomorrow or early next week.

Speculation is growing that Bank of Ireland will employ the tactic Lloyds TSB did when it pursued Abbey last year, which was to produce a lot of information about its offer without actually making a formal bid.

One City source said: "It is going to be a bear hug, making it very difficult for Abbey to shake Bank of Ireland off because the information will be in the public arena for Abbey's shareholders to consider."

Bank of Ireland has also not ruled out a hostile bid, but it too is reluctant to make one as it wants to conduct thorough due diligence on Abbey's business.