Abbey National, Britain's sixth-biggest bank, has been informally approached by Bank of Ireland over a possible merger – a move which could throw into doubt its latest attempt to appoint a new chief executive.
Abbey has been seen as a takeover target after rising bad loans led to a dramatic slump in profits this year and to the departure of its chief executive, Ian Harley.
Bank of Ireland, which owns Bristol & West in the UK, yesterday confirmed it had approached Abbey, but said in a statement: "No formal discussions have yet taken place." It added that if the two were to combine the primary listing of the new bank would be in London with the head office in Dublin.
Bank of Ireland, which contacted Abbey three weeks ago, is keen to extract a deal while Abbey is in a weak position. The UK bank's shares slumped last week to their lowest point in seven years.
The emergence of the Bank of Ireland approach could undermine Abbey's move this week to select a new chief executive.
Lord Burns, who took over the day-to-day running of Abbey when Mr Harley stood down in July, is due to interview five candidates for the post tomorrow, with a sixth person to see on another day. They may now have lost interest in the post.
The contenders, all of whom are high-flyers in retail banking, include John Stewart, the deputy chief executive of Barclays, and Gordon Pell, the respected head of Coutts, which is part of Royal Bank of Scotland.
Adam Applegarth, the chief executive of fast-growing Northern Rock, and Eric Daniels, head of retail banking at Lloyds TSB, are also thought to be likely contenders. The strongest internal candidate is Stephen Hester, Abbey's finance director.
Bank of Ireland, which is smaller than Abbey, is respected and thought to have an impressive management team. City sources have speculated that Michael Soden, Bank of Ireland's chief executive, wants to become head of the merged group and so wants to secure a deal before Abbey's appointment process develops any further.
Mr Soden is thought to have already appointed Schroder Salomon Smith Barney to work on the deal. Abbey is not thought to have asked advisers specifically to look at this deal, but uses Morgan Stanley on an ongoing basis.
Abbey would not comment on the talks. Its camp is keen to emphasise its shareholders would be opposed to a deal based on its current share price, especially as Lloyds TSB offered £13 a share for the bank before the deal was blocked by the Competition Commission.
Hostile bids are unusual among UK banks, making it likely that if Bank of Ireland persists with its offer, it will have to pay a significant premium to the current share price to persuade Abbey's board to agree to a deal.
Observers believe a deal is more likely now than under Mr Harley, who was strongly in favour of Abbey retaining its independence. Lord Burns, a former Treasury mandarin, is thought to have a more pragmatic outlook.
A tie up between Abbey and Bank of Ireland would create Europe's 12th largest bank, which would be worth more than £15bn. Bank of Ireland has been linked to a number of suitors, including its main domestic rival, Allied Irish Banks, and, in 1999, Alliance & Leicester.
Abbey has also been named as a possible partner for Alliance & Leicester, but its most persistent pursuer is National Australia Bank, which owns Yorkshire and Clydesdale banks in the UK.
A hurdle Bank of Ireland would have to overcome would be persuading Abbey's shareholders to accept its Dublin-quoted stock for the bank.
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