State to own 43% of Lloyds after merger

The Government will own almost half of Lloyds Banking Group, after investors in Lloyds TSB and Halifax Bank of Scotland (HBOS) shunned the banks' combined £13bn share offers.

The Treasury underwrote the share sales as part of October's capital plan for the banking sector and has been left with a paper loss of £3.6bn based on Friday's closing prices.

Shareholders in each bank had until Friday to take up shares in the stock offers, but only 0.5 per cent of Lloyds shares were bought, while HBOS investors bought just 0.24 per cent of the offer. The Government, which underwrote Lloyds' £4.5bn offer and HBOS's £8.5bn cash call as part of its sector bailout, will own 43.4 per cent of the merged bank's ordinary shares and £4bn of preference stock.

Lloyds is set to buy HBOS on Friday in a Government-brok-ered takeover, with shares in the combined bank due to start trading under the Lloyds Banking Group name on Monday.

A Scottish court hearing to approve the takeover of HBOS rubber-stamped the deal yesterday.

Heavy job losses are expected as the banks are integrated.

The banks' shares had languished far below the offer prices for weeks, giving existing shareholders no incentive to take up their right to new stock. Lloyds said its directors took up their allocation of shares. HBOS did not disclose whether its directors, who will step down when the bank is acquired, bought new shares.

Eric Daniels, Lloyds TSB's chief executive, said: "We are pleased that the capital-raising process has completed and that the new, combined group will have a strong financial position. We understand that many existing shareholders did not participate because of the divergence between the offer price and the current market price."

Mr Daniels had predicted that there would be a good take-up of Lloyds' new shares after the bank claimed that it would be able to start paying dividends again this year after buying back the Government's preference shares.

The Government insisted that shareholders should be allowed to subscribe for up to 35 times their allotment. The move was intended to minimise the Government's holding by making lots of shares available, but it gave investors a free option on extra stock, ensuring that the shares' values would not rise above the offer prices.

Lloyds shares rose 7 per cent to 140.7p yesterday, while HBOS's rose 5.4 per cent to 84.1p. Lloyds had offered its new shares at 173.3p and HBOS's were priced at 113.6p.