Northern chill over merger

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The Independent Online
'A TAKEOVER bid designed by a committee and made in hell' is how one building society analyst described merger plans between the Northern Rock and North of England (NoE) building societies.

Robin Boyle sees the merger as 'the steal of the decade. Northern Rock is buying a stronger rival, which will boost its ratios on the cheap'.

Under the terms of the merger NoE will lose its name, its chairman and its chief executive. 'This is not a merger - it's a takeover, and should be seen in those terms,' Mr Boyle says.

The new society will rank among the top 10 building societies and have a commanding position in the North-east.

Figures mentioned so far suggest that Northern Rock will pay a dowry of up to pounds 11.4m - an average of pounds 50 per member - to its new partner. This represents 1 per cent of NoE's retail deposits.

But assessed on the same terms as the Cheltenham & Gloucester in the recent takeover by Lloyds Bank, NoE should be worth 2.1 times the value of its pounds 82m net assets - giving a figure of more than pounds 172m.

In financial strength rather than sheer size, North of England is one of the most solid societies in the whole industry. The Tier 1 capital ratio is a widely used technical yardstick. It shows the proportion of shareholders' capital to assets - a measure of the percentage of long-term capital backing up the business.

NoE's ratio is currently quoted as 13.5 per cent, compared with Northern Rock's 8.54 per cent. The Cheltenham & Gloucester figure is predicted to grow to 12.6 per cent next year. By this ratio, NoE is stronger than Lloyds Bank itself (6.6 per cent), NatWest (5.7 per cent) and the Abbey National (9.4 per cent).

Ron Stout, NoE head of corporate affairs, denies that the present proposals should be seen as anything but a merger. Cheltenham & Gloucester shareholders are being asked to give up ownership of a mutual organisation, whereas NoE members will not lose that.

He says that though neither society needs to merge, the marriage will be good for the region, establishing a large northern society that will itself be less vulnerable to takeover.

Benefits from the partnership will be a wider branch network and more jobs at NoE's new head office in Sunderland. It seems there will be little rationalisation, and no compulsory job losses.

Members of the North of England will have to vote on the deal, probably in August, with the merger planned for October.