RPT-UPDATE 2-Lloyd's auction reels in Macquarie, Pepper with Westpac lurking-sources

Tue Oct 1, 2013 5:19pm EDT

* Assets on sale have face value of some A$8.5 billion

* Sell-off part of global move to offload non-core assets

* Macquarie, Pepper bids likely low, sector watchers say

By Jackie Range

SYDNEY, Oct 1 (Reuters) - In Lloyd's Banking Group's international garage sale, Pepper Australia and Macquarie Group submitted competing bids for assets that the British bank is offloading in Australia as the auction drew to a close.

But sector watchers expect the bids are likely to be on the low end of Lloyd's' hopes, potentially leaving the way clear for a rival offer expected from Australia's second-biggest bank, Westpac Banking Corp.

Lloyd's is selling corporate loan, motor and equipment financing businesses in Australia with a face value of some A$8.5 billion ($7.95 billion), people familiar with the process told Reuters.

The sale is part of a global plan by Lloyd's to cut costs and strengthen its balance sheet as the bank shrinks its international operations and refocuses on lending to British households and businesses.

Lloyd's began its sell-off with a portfolio worth some 200 billion pounds ($324 billion), and has now more than halved it. The British government is eventually expected to sell its 32.7 percent share in the bank.

People familiar with the process said on Tuesday that non-bank lender Pepper Australia and Macquarie, the country's biggest investment bank, made final bids for the assets. The operations up for sale now have an estimated net book value of A$1 billion, according to one person familiar with the matter.

Pepper Australia's bid highlights its ambitions, after having grown rapidly through a string of acquisitions since being founded in 2001 by its current executive chairman Mike Culhane, a former investment banking executive. In 2011 Pepper bought GE Capital's Australia and New Zealand mortgage lending business, housing some A$5 billion of residential mortgages.

But investment industry sources said the bids by both Pepper, which is leading a consortium that also features Bank of America Merrill Lynch, and Macquarie, are likely to be on the low side and potentially be trumped by Westpac, Australia's second-biggest bank by market capitalisation.

Westpac was a shortlisted contender ahead of the Sept. 30 deadline for final bids. It declined to say if it is still in the race, but is widely expected to have put in a bid.

LLOYD'S SELL-OFF DRIVE

Up for sale in Australia are Lloyd's BOS International corporate loans business and its Capital Finance motor and equipment finance business, another person familiar with the matter said. Among the few assets Lloyd's assets left in Australia after this deal would be a branch licence.

Elsewhere this year Lloyd's has made U.S. mortgage portfolio disposals and sold its Spanish retail banking business. Last week it agreed to sell a portfolio of European commercial real estate loans to private equity group Cerberus for 263 million pounds.

In Australia, Lloyds has already sold a A$371 million portfolio of loan assets from its unit BOS International Australia to Bain Capital's Sankaty Advisors. Japan's Nomura Holdings Inc also purchased loan assets with a face value of around A$150 million for an undisclosed sum, sources said.

If either Pepper or Macquarie wins, neither is expected to face regulatory hurdles. But Westpac could attract attention if it were to emerge as the winner because of its size as a lender in the Australian market, a banking source said.

For Macquarie, a deal could enhance earnings per share by using up some surplus capital and liquidity, Brian Johnson, an analyst at CLSA said.

"But I still don't think they would buy it unless they perceived it to be an absolute bargain," he said.

Pepper is eyeing the Capital Finance operation, while consortium partner Bank of America Merrill Lynch is looking to buy the BOS International corporate loan book, according to people familiar with the process.

Pepper is receiving mergers and acquisitions advice from Bank of America Merrill Lynch. Goldman Sachs is advising Lloyd's on the sale.

Australia and New Zealand Banking Group Ltd was also previously vying for the assets, but dropped out of the race, people familiar with the process said.

Goldman Sachs wasn't immediately available to comment.

Pepper Australia, Lloyd's, Westpac, Macquarie, Bank of America Merrill Lynch and ANZ declined to comment.

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