Nationwide and Portman merge into £150bn giant

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The Independent Online

The UK's largest building society, Nationwide, unveiled proposals to acquire its rival Portman for some £500m yesterday, consolidating its position as the UK's largest mutual organisation and propelling it past Abbey National to become the country's second-biggest mortgage lender.

The deal will be the largest-ever building society merger, creating a combined business with gross assets of more than £150bn and more than 13 million customers.

Portman's 2 million members stand to make a windfall of at least £200 a head. Some may receive much more. The size of each payout will depend on how large a mortgage or savings balance its customers have. Customers will have to maintain a minimum balance of £100 in their accounts until the transaction completes - towards the end of next summer - to qualify for the windfall.

The deal is the latest in a wave of consolidation in the building society sector. Earlier this year, Portman snapped up Lambeth Building Society, while other deals in 2006 have included Leeds' takeover of Mercantile and Newcastle's acquisition of Universal.

Nationwide's chief executive, Philip Williamson, who has been with the company for some 15 years and at the helm for more than five, is to step down once the deal is complete, as will Portman's chief executive, Robert Sharpe. Nationwide's group finance director, Graham Beale, will take over as chief executive of the combined business.

Commenting on the deal, Mr Williamson said: "Portman has acquired two building societies in recent times, so as a board they clearly had a belief that being big was important to compete in the financial services market. That's a belief I share. So I phoned Robert and asked whether he'd be interested in talking to us.

"As a result of the merger, 13 million people will be members of a bigger and even better society, offering market-leading products and pricing, underpinned by a strong commitment to mutuality."

The merged entity will have more than 880 branches and 18,000 staff across the UK. Mr Williamson conceded that there were likely to be some job cuts.

"What will happen is that the deal will not become effective until September next year, so just through natural turnover that we both see [in our workforces], we will be able to reduce the headcount. But there will be some job losses. Unless we want to suck the value out of the membership, we have to look at this professionally and commercially."

The deal will make Nationwide the UK's second-largest mortgage lender, behind HBOS, with a market share of about 10 per cent. It will consolidate the company's position as the second-largest deposit taker in the country.

Nick Sandall, head of retail banking at Deloitte, said it was unlikely to be the last deal in the sector. "With the high street banks achieving economies of scale through cross-border M&A activity, there is pressure on the building societies to reduce their costs if they are to continue to stay competitive by offering good value products to their members," he said. "Building societies are generally well trusted by retail customers, so by strengthening their position in the market, they can continue to aggressively challenge the banks."

However, Cazenove's analyst Simon Pilkington warned it was "uncertain" as to whether the deal would create a more effective competitor in the financial services market. "At the margin, a larger mutual brings additional competitive pressure to UK retail banking, but Portman does not transform the size of Nationwide," he said. "The threat is over the medium term and only if the management adopts the more aggressive approach of Portman."

Merger effects

* The merger will create the UK's second largest mortgage lender and largest mutual organisation with assets of £150bn

* Qualifying Portman members will receive minimum windfalls of £200 next year, and more for those with big savings or mortgage balances

* The Nationwide and Portman chief executives will step down after the deal. The Nationwide finance director will take the helm

* The combined business will have 880 branches and 18,000 staff, although job cuts and branch closures are planned