Abbey National rebuffs £10.3bn BoI bid

Bank battle: Irish sweeten offer with £1.9bn cash element, but Lord Burns questions benefits of a deal

Bank of Ireland stepped up its pursuit of its larger rival Abbey National yesterday by appealing direct to Abbey's shareholders, unveiling an indicative price tag of £10.3bn for the UK bank and promising £400m of annual savings from the deal.

Abbey, which has already shunned Bank of Ireland's approach, said there was "no material new information" in the details which it made public.

The board of Britain's sixth biggest bank is reluctant to open negotiations with Bank of Ireland because it wants to pursue an independent strategy, but will do so if it comes under intense pressure from institutional shareholders in the next few days. Opinions among the institutions were divided by the details of Bank of Ireland's offer. One of Abbey's largest shareholders said: "This is not very exciting and I would encourage Abbey not to get around the table. It has a big job to do, either on its own or with a partner. But Bank of Ireland is the wrong partner."

Another struck a different note, saying: "I have my doubts about the deliverability of the Bank of Ireland deal, but it would be foolish not to enter talks."

Bank of Ireland, which first wrote to Abbey on 19 September, said its cash and shares offer would involve Abbey shareholders being given between 90 and 95 Bank of Ireland shares for every 100 Abbey shares they owned. They would also receive 130p per share in cash. Bank of Ireland's shares closed at €10.04, valuing Abbey at between 700p and 732p a share. Abbey's shares, which have been gaining steadily since the Bank of Ireland proposal was made public two weeks ago, rose 11 per cent to 685p.

The bulk of cost savings from the deal with Ireland's largest bank would be from tying up Bristol & West, its mortgage bank in the UK, with Abbey. The move would involve cutting staff and closing a substantial number of the 200 branches Bank of Ireland owns in the UK. Bank of Ireland is also considering merging the asset management and internet businesses of the two banks and their product manufacturing operations.

The bank believes that at least £400m of annual synergies could be achieved by the end of the fourth year. The synergies would include £160m of revenue synergies a year, which would mainly be achieved by increasing the number of products sold to customers through Abbey branches. But Abbey's chairman, Lord Burns, questioned whether the synergies could be achieved.

Bank of Ireland thinks the cost savings could be far higher than £400m, but is unwilling to name the total estimate because it wants access to Abbey's books to conduct due diligence on the business. It is likely that if Abbey agreed to enter talks, Bank of Ireland would raise its indicative bid.

Abbey continues to attract interest from other potential bidders. Lloyds TSB, which was blocked from buying Abbey last July by the Competition Commission, has expressed interest in its consumer credit arm, First National.

Some shareholders would like Abbey to sell this business off, to raise up to £700m and to assist it in its process of focusing on its core operations as a mortgage bank.

Speculation is growing that Abbey's entire business still could be targeted by a UK bank, despite the Competition Commission's decision. Tom Rayner, an analyst at Dresdner Kleinwort Wasserstein, said: "The UK competitive environment has changed quite a lot. If the right bank came along, the Competition Commission might be more comfortable."

National Australia Bank is also interested in Abbey and may re-enter the fray.

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