City balks at high price of Barclays' proposed £5.4bn bid for Woolwich

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CONSOLIDATION among UK retail banks is back on the City agenda after Barclays yesterday confirmed it was in talks about an agreed £5.38bn bid for Woolwich, the building society turned bank.

CONSOLIDATION among UK retail banks is back on the City agenda after Barclays yesterday confirmed it was in talks about an agreed £5.38bn bid for Woolwich, the building society turned bank.

Shares in Abbey National, which is understood to have rebuffed takeover approaches from both Barclays and Lloyds TSB in recent months, rose 19p to 754p. Alliance & Leicester, a favourite City takeover target, rose 31p to 530p, while Northern Rock rose 25p to 392p.

However, Barclays' shares fell as analysts accused the bank of paying dearly to increase its exposure to a highly competitive UK mortgage market, although fund managers appeared more inclined to back the deal.

"It is completely the wrong deal in the wrong place at the wrong price," said one analyst, who declined to be named. "It looks like the kind of deal someone coming in from abroad who wants to do a quick deal would do, rather than something a seasoned UK banker would have done. Northern Rock or Alliance & Leicester would have given them a bigger market share much more cheaply."

Barclays' proposed cash-and-shares offer valued Woolwich at 353.75p last night. That is 19.7 per cent above the 292p price at which the former building society floated three years ago, but well below the 389.5p at which Woolwich shares peaked earlier this year. Woolwich shares closed up 72p at 341p.

Brokers said that to justify the price, Barclays would have to find £100m of annual cost savings from the deal, plus a further £200m in extra sales by marketing the Woolwich's innovative Open Plan offset accounts to Barclays' much larger customer base.

Talks between the two banks, which began on Friday, are understood to have reached an advanced stage, with John Stewart, Woolwich chief executive, pushing for the main board responsibility for retail banking.

Bankers say the role Mr Stewart wants is unlikely to leave much room for John Varley, the chief executive of retail banking at Barclays, who has borne the brunt of outside criticism over cash-machine charges and branch closures. He would either have to be found another role or leave altogether, bankers said.

Mr Stewart's title and the implications for Barclays' boardroom structure were believed to be the main issues holding up an agreement yesterday.

Mr Stewart is understood to be looking for a clear indication that he is number two in the pecking order after Matt Barrett, Barclays' chief executive. The two are said to have forged a strong rapport in their conversations over the past few days.

Mr Barrett is also believed to be impressed by the Woolwich's success in exploiting information technology to win traditional clearing-bank business from rivals. He is keen that this deal should be seen as being about more than just Barclays buying a mortgage bank and doubling its share of the mortgage market to 10 per cent.

One banker said yesterday: "What we are talking about is something like the NatWest and Legal & General deal, where NatWest was buying Legal & General to get its hands on the management skills of its chief executive, David Prosser.

Barclays would be doubling its share of the mortgage market, but it would also be getting Mr Stewart's management skills."

Mr Stewart has been open for some time about his belief that Woolwich needs bigger scale to make the most of its £125m investment in Open Plan. However, analysts were irritated to discover Barclays in takeover talks when, last Thursday at the half-year results briefing, Mr Barrett had implied that organic growth was his preferred route.

Analysts also expressed concern over the difficulties of integrating a business that has diversified out of mortgage lending and is winning share in current accounts and credit cards. It is not clear whether Barclays could exploit Open Plan without cannibalising its existing profitable customer base. "This is not like Lloyds taking over Cheltenham & Gloucester. It is a very dirty deal," one analyst said.

Barclays is offering 164p cash and 0.1175 of a Barclays share for each Woolwich share. At Tuesday's close of 1,667p, the offer valued Woolwich at 362p a share, a premium of 34 per cent to its closing price on Tuesday. The City has been primed not to expect massive branch closures or job losses, despite some overlap in the South-east, where most of Woolwich's 404 branches are.

Barclays is already cutting 4,500 jobs this year on top of 7,000 last year.

Bankers thought a counterbid unlikely. Royal Bank of Scotland is still absorbed with the integration of NatWest, while Lloyds TSB would probably hold fire in the hope of later getting its hands on Abbey National.

John Tyce, analyst at SG, said: "I thought mortgages were supposed to be a commodity business, and this is a very grown-up price. Is Woolwich a significantly unique business to warrant a valuation of three times book? This is not Morgan Stanley buying Dean Witter."

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