Treasury enriched by bid war

A WINNER has already emerged in the hostile takeover bid for NatWest, currently being slugged out between Scotland's two banking giants. It is the Government.

It came as no surprise when Stephen Byers, the Secretary of State for Trade and Industry, ruled last week that Royal Bank of Scotland's offer did not raise competition concerns. Its bid joins that of rival Bank of Scotland on the table, and two contenders means the Treasury's slice of the deal increases to more than pounds 150m.

The colossal cost of the pounds 25bn tug of war - the outcome of which will be known on St Valentine's Day - means that stamp duty and value-added tax on payments made to advisers will be substantial.

The winner will have to pay stamp duty of 0.5 per cent on the total cost of the deal - an automatic pounds 125m into the Government's coffers. Both banks are employing teams of expensive advisers: the cost of these is estimated at pounds 62.5m for Bank of Scotland and pounds 100m for Royal Bank. These payments incur VAT at 17.5 per cent, which has to be paid whether the bidder wins or loses. In the unlikely event that NatWest repels both predators, the Government still claims VAT on the advisers' payments.

Now Royal Bank has been given the nod by Mr Byers, the timetable reverts to zero for both bidders. NatWest has 14 days to respond to the latest bid. Its shareholders will certainly be busy in the new year: they have 60 days to decide if one of the bids is to be successful and will be visited by persuasive representatives from NatWest, Royal Bank and Bank of Scotland to help them make up their minds.

Royal Bank is offering 0.968 of its shares plus pounds 3.50 in loan notes for each NatWest share, valuing the deal at around pounds 23.7bn. Bank of Scotland's bid is pounds 23.7bn plus pounds 2bn from the sale of its assets.

The general feeling in the City is that Royal Bank will win, despite the sharp fall in its share price. But even though Bank of Scotland's share price rose on the news that Royal Bank will be allowed to continue with its bid, this could be bad news.

"It means that the market thinks Bank of Scotland is going to be attacked itself once its bid for NatWest fails," says Justin Urquhart Stewart, business development manager at Barclays Stockbrokers. "Royal Bank should win. It can make a higher offer as it has deeper pockets. If I were NatWest, I would be measuring up for a kilt."

NatWest sold NatWest Equity Partners, its venture capital arm, to the operation's managers on Friday. This is one of a series of disposals that NatWest promised in its defence to the two bids.