HBOS, the UK's fifth largest bank, surprised the City yesterday when it announced it would not be making a bid for Abbey National, walking away from what its chief executive, James Crosby, recently described as a "once in a generation opportunity".
The move seemingly leaves the path clear for Santander Central Hispano (SCH), Spain's largest bank, to snap up HBOS's biggest rival. Its share-based offer - worth some £8.56bn after a 3 per cent fall in SCH's shares yesterday - is the only one left on the table and looks unlikely to be challenged.
The stock market sent HBOS's shares up more than 3 per cent to 738p, while Abbey's shares fell more than 6 per cent as many arbitrageurs cut their losses, resigning themselves to the likelihood of there being no bidding war.
HSBC is widely seen to be the only remaining potential UK bidder for Abbey. However, the group has so far remained quiet over its intentions, refusing to rule itself in or out.
Mr Crosby said yesterday he did not feel there was any shame in the decision to walk away from the deal, arguing that the risks involved were simply too high in comparison with the potential benefits.
"I agree that, in this day and age, when you get to this stage in what has been such a public process, it is a tough decision to pull away and the easier decision is to carry on," he said. "But we've done the right thing for our shareholders.
"Despite the enormous synergies we could see in this transaction, the risks were there ... particularly the risk that we would have diluted what we would deliver to shareholders." SCH said it was relieved to know that the uncertainty of a possible HBOS bid was behind it. Juan Rodriguez Inciarte, the group's head of European operations, who has led the Abbey bid, said: "I think today we have a little more wind in our sails."
He added that the SCH bid would provide "value, immediacy and certainty" for Abbey shareholders.
Analysts who follow the fortunes of HBOS largely welcomed the news, admiring the restraint exercised by the bank's management. James Leal, an analyst at Teather & Greenwood said: "I think there is an element of disappointment because buying Abbey National would have been a good move for HBOS. But I think the fact that they let it go reflects well on HBOS's management. Usually egos are in control in these situations, but they've turned their back on the deal and that's a good thing."
Mr Crosby said he did not feel under any pressure to look at other acquisitions in the short term, adding that he was looking forward to the challenge of taking on the Spaniards on his own territory.
"We're a very competitive organisation, and we rather like the idea of someone new to have a go at," he said. "You can rest assured we'll be laying on a very special HBOS welcome for them on the high street."
SCH took several more leaps towards a successful acquisition yesterday, as it received clearance for the deal from the European Competition Commission, and confirmed it will obtain a London market listing if the deal is completed.
Providing existing Abbey shareholders with a mechanism to hold sterling-denominated shares is likely to be important in securing sufficient support at the extraordinary general meeting, scheduled for 14 October. SCH needs to secure the backing of 75 per cent of the bank's shareholders. SCH also said yesterday that it would provide a free dealing facility for investors with less than 2,000 Abbey shares for the first six months after the deal's completion, to ensure that small investors can cash in their holdings fee-free ahead of SCH securing its London listing.
The Spanish bank also confirmed that once its London listing was completed, it would provide quarterly dividend payments in sterling to its investors in the UK.
In reaction to yesterday's news, Abbey said it welcomed the end of the uncertainty, but said that it would, of course, look at any offers made ahead of the EGM.
VIEW FROM THE BANKS
"I think today we have a little more wind in our sails." - Juan Rodriguez Inciarte, the group's head of European operations, who has led the Abbey bid
"It is a tough decision to pull away, and the easier decision is to carry on. But we've done the right thing for our shareholders." - James Crosby, the chief executive of HBOS