LONDON (Reuters) - British bank Lloyds TSB has agreed to buy rival HBOS Plc to create a 28 billion pound ($50 billion) mortgage company, a person familiar with the matter said on Wednesday, making it the latest troubled bank to be forced into the arms of a better-funded rival.
HBOS, Britain’s biggest home loan lender, will be bought for 232 pence per share in an all-share deal, valuing it at over 12 billion pounds, the source said.
The deal is expected to be formally unveiled on Thursday.
HBOS had said earlier on Wednesday it was in “advanced talks” with Lloyds after its shares were battered for a sixth consecutive day on mounting fears about its funding position. Its shares still fell 19 percent on Wednesday to 147.1 pence,
A takeover will mark another chapter in a dramatic shake-up of the global financial landscape as firms with weaker balance sheets or funding strains are swallowed by stronger rivals, with deals encouraged by authorities worried about a wider meltdown.
Prime Minister Gordon Brown was involved in negotiating Lloyds’ deal for HBOS, the BBC said.
Alistair Darling, UK finance minister, said before the deal was sealed that the government was “keeping very closely in touch” and he expected commercial negotiations between the two banks to go on into the night.
“They’ve got to decide what’s best for the two banks concerned,” Darling told BBC television. “My job is to make sure that we do everything possible at this time, especially when you are seeing difficulties all over the world, that we help homeowners, we help savers by maintaining the stability of the banking system.”
The government is expected to smooth any competition concerns about the tie-up on grounds that it would help financial stability.
Lloyds is Britain’s fifth-biggest bank and HBOS ranks sixth, but they rank fourth and first for mortgage lending and would have a 28 percent share of home loans, and also be the biggest taker of savings and provider of current accounts.
HBOS has lost more than half its value in the last six days -- its shares crashed from 308.5 pence on September 9 to an all-time low of 88p earlier on Wednesday.
Lloyds shares ended unchanged at 279.75p, valuing it at almost 16 billion pounds. The DJ Stoxx European bank index fell 4 percent as the sector was hit hard again.
A deal would be attractive for Lloyds as it can cut costs, increase market shares and lift margins to offset the prospect of higher bad debts as the economy worsens, analysts said.
“It would be a good deal for Lloyds. We haven’t been allowed to have bank mergers for competition reasons, but there’s a huge amount of overlap and costs that can be taken out,” said Alan Beaney at Principal Investment Management, which holds Lloyds and HBOS shares.
The talks were encouraged by both the Treasury and UK regulator the Financial Services Authority, the BBC said.
HBOS has come under mounting pressure as it is more reliant on wholesale markets to fund its business than other UK banks, and the cost of borrowing funds in the interbank market continues to rise as the credit crunch has made banks reluctant to lend to each other.
The Bank of England on Thursday said it would allow banks an extra three months to swap their risky assets for government paper, to ease short-term funding strains.
But there was a growing fear that savers with HBOS could withdraw funds and create a bigger problem.
There were no signs of a rush to withdraw on Wednesday and some HBOS customers welcomed the takeover talks.
“The (possible) takeover is good news. I‘m more worried about why the government aren’t doing more,” said Margaret, a 37-year old housewife outside a London branch.
HBOS and the FSA sought to soothe concerns about HBOS’s funding position before the takeover news broke, both saying the bank was well capitalized and continuing to fund its business.
Additional reporting by Sumeet Desai, Adrian Croft, Frank Prenesti, Kate Kelland, Neal Parsons, Lorraine Turner and Olesya Dmitracova; Editing by Elaine Hardcastle and Quentin Bryar