The OFT earlier this week announced it was giving itself until 29 December to decide whether to recommend a reference. RBS's advisers believe that John Bridgeman, the director general of fair trading, asked for the 15 working-day extension in order to study more closely whether the density of the combined businesses raised competition concerns.
In the North-west of England, the two banks combined would have a high proportion of small and medium-sized business lending. However, this might be addressed through branch disposals and the transfer of this lending to another bank.
Stephen Byers, the Secretary of State for Trade and Industry, made reference to the fact that there were no overlapping branches between NatWest and Bank of Scotland in his statement giving Bank of Scotland clearance for its rival NatWest bid last Thursday.
NatWest is understood to have demanded more than pounds 17.50 a share from the Royal Bank of Scotland in talks last weekend as the price of board recommendation, way above RBS's initial pounds 15.60 a share offered, based on last Friday's RBS closing price of pounds 13.28. The precise terms demanded by NatWest's advisers were one RBS share and pounds 4.50 in cash for each NatWest share.
Terry Eccles of JP Morgan, adviser to NatWest, said that RBS shares would fall on Monday once the bid became public, devaluing a mainly share bid.
However, RBS's advisers, Merrill Lynch and Goldman Sachs were adamant that RBS's shares would rise on Monday. They were also hamstrung by the fact that the RBS was not authorised by its partners - BSCH, the Spanish banking giant, and CGU, the insurance group - to go much beyond the initial offer. On Monday RBS tabled a bid of 0.968 shares plus 305p in loan notes, only marginally above its starting point on Friday night of 0.95 shares and pounds 3.
NatWest's advisers were proved right. RBS shares have fallen by nearly 10 per cent while Bank of Scotland has risen - so its offer is now worth considerably more than RBS's.
Merger arbitrageurs and propriatory trading desks have decided to sell what they believe will be the eventual winner. "At some point this will inverse when people realise that with Bank of Scotland's offer worth more than pounds 1 more than RBS, there is a danger it might win," one trader said yesterday.