HBOS extends rally as investors back Lloyds deal

By Steve Slater and Raji Menon

LONDON (Reuters) - Shares in HBOS Plc HBOS.L jumped over 10 percent on Thursday amid mounting confidence its proposed takeover by Lloyds TSB (LLOY.L) will go ahead as several big investors backed the deal.

M&G, the sixth largest shareholder in both HBOS and Lloyds, said it supported the takeover under the original terms agreed.

Anthony Bolton, president of investments at Fidelity International and one of Britain's top performing fund managers for two decades, also supported the deal, although Fidelity -- also a top shareholder in both banks -- said those were his personal views and declined to say if it supported the deal.

"My personal view on this is that it will succeed and it will go through on the original terms, and I think most parties would like it to succeed on that basis," Bolton told BBC radio.

By 1445 GMT HBOS shares were up 14 percent at 169.3 pence, the top FTSE 100 stock .FTSE, narrowing the discount of its shares to Lloyds' offer price to 23 percent.

Lloyds shares were up 6 percent at 265p, valuing its all-share offer at 220p.

Also supportive was a report that Commonwealth Bank of Australia (CBA.AX) has offered to buy HBOS's Australian business BankWest. HBOS and CBA declined comment, but analysts said the banks are likely to be in talks.

The deal will deliver big cost savings and create a domestic banking powerhouse, although countering that is concern Lloyds will be exposed to potentially big losses from HBOS's holdings in U.S. mortgage related assets, its capital ratios will fall and it will become more dependent on wholesale funding.

SHARED SHAREHOLDERS

HBOS shares had traded at a 35 percent discount to the proposed Lloyds' offer this week as fears mounted that shareholders may not approve the deal or Lloyds could revise terms, but the shares have rallied and the discount narrowed as investors said they backed the deal.

The discount had also been exaggerated because of HBOS's vulnerability if the deal fell through, Credit Suisse analyst Jonathan Pierce said in a note. "So a relatively small risk of failure translates to a large discount," he said.

A ban on short-selling had also made it harder for arbitrageurs to trade the shares and exaggerated the discount, dealers said.

Many of Lloyds' big investors are also major HBOS investors, making it more likely they will support the deal, analysts said.

Some 17 of Lloyds' top 25 investors are also sizeable investors in HBOS, according to Thomson Reuters data. These companies own 29 percent of Lloyds and 30 percent of HBOS, the data show.

Standard Life, a big investor in both banks, plans to support the deal, a person close to the investor said on Wednesday.