Slowly but surely the rebellion over HBOS deal begins to grow

Published on Wednesday 24 September 2008 22:30

A SENIOR European banker has launched a scathing attack on Lloyds TSB's £12 billion bid for HBOS, insisting the deal was bad for shareholders and consumers, and that the Scottish bank could survive alone.

Alex von Ungern-Sternberg, a former group treasurer of Deutsche Bank, has joined a line of high-profile business people – and The Scotsman – in questioning the deal. He sets out his damning critique in The Scotsman today and is rallying other public and private shareholders. He believes HBOS can still go it alone and has spoken to John Swinney, the finance secretary.

Mr von Ungern-Sternberg spoke out as a separate group of leading finance figures planned their own revolt against the tie-up and prepared to meet the Scottish Government next week.

As the gap between the HBOS share price and the bid terms widened on the stock market yesterday, the Scottish Liberal Democrats called for a joint Westminster-Holyrood inquiry into the deal, and Alex Salmond, the First Minister, issued a statement to parliament vowing to argue Scotland's case "clearly, simply and persuasively" in talks with Lloyds TSB.

The intervention by a senior European banker adds to mounting concerns over the proposed takeover across the financial and business community. And it will swell the growing number of calls for action – either for shareholders to reject the deal or for the structure to be radically recast to ensure a continuing role for the Bank of Scotland name and legal status.

The Scotsman has already reported concerns raised by the likes of Sir Donald Mackay, the chairman of the Scottish Mortgage Trust; Sir George Mathewson, a former chief executive of the Royal Bank of Scotland; Sir Peter Burt, a former governor and chief executive of Bank of Scotland; Keith Skeoch, the chief executive of Standard Life Investments; and David Alexander, the owner of Edinburgh-based property firm DJ Alexander.

Sir Donald, Sir George, Sir Peter, Mr Skeoch and Mr von Ungern-Sternberg possess well over 150 years of top-flight banking experience between them, having responsibility for billions of pounds.

Analysts from JP Morgan and Socit Gnrale have also issued damning reports on the consequences of a takeover for both institutions.

Last night, experts said the collective concern could prompt shareholders to vote against the deal – particularly if it led to other proposals being mooted.

Mr von Ungern-Sternberg, who is also a previous deputy chief executive of Barclays Bank's global markets division, said the deal "makes no sense for HBOS shareholders who would be selling out… at less than half the price at the Halifax demutualisation in 1997".

He added: "A rapid and significant share price recovery (say by 50 per cent or more] is far less likely than for HBOS on its own.

"It makes no sense for Lloyds TSB shareholders, either.

"Job prospects (in Scotland] and in England all have to be seen as endangered, despite soothing words to the contrary in the takeover agreement."

He said it also did not make sense in terms of public policy to concentrate so much pricing power in the hands of a merged Lloyds TSB. Market shares ranging between 28 and 45 per cent "cannot be in the public interest longer term and is likely to be revisited with negative shareholder consequences".

Mr Ungern-Sternberg, who is a minor shareholder in HBOS, firmly believes there is an alternative for the bank. "The problem can be fixed without a merger," he said. "The non-retail asset side of the balance sheet should be run down to a level safely funded whilst interim funding gaps are plugged, using for example the Bank of England's special liquidity scheme. This would be in everyone's interest."

Shares in Lloyds rallied by 5.25p to 267p yesterday but are still down more than 6 per cent so far this week. A gap of 41p has opened up between the HBOS share price – 180.5p – and the paper terms of the Lloyds TSB offer, effectively worth 221.61p. This points to market doubts over whether the takeover in its present form will go through.

Noting the banks' share prices, Mr Ungern-Sternberg, now chief executive of boutique investment firm Euro IB, said: "It appears the market itself doubts the viability of this plan – not-withstanding the raft of advisers and spin doctors paid handsomely to propagate it."

He intends to rally shareholders to the cause, while a separate "Save the Bank" consortium of business people and bankers is due to meet Alex Neil, MSP, a member of Holyrood's finance committee, on Tuesday.

However, HBOS corporate customers may be reluctant to join either campaign, given the hope that a takeover presents for an easing of draconian cutbacks in Bank of Scotland lending.

The switch from hectic lending expansion, particularly to property and housebuilding firms, has unnerved business customers, particularly those close to overdraft limits. One senior Scottish finance figure said: "They're really apprehensive. They don't know whether Lloyds will turn out to be the cannibal or the missionary."

Others are not sure a separate Bank of Scotland could be reconstituted. Colin MacLean, managing director of Scottish Value Management in Edinburgh, said: "Perhaps Alex Salmond could buy the name and keep it for a future Scottish central bank. But some of the problem lending decisions within HBOS were made by Bank of Scotland and it would be difficult to disentangle."

Bryan Johnston, of the stockbroker Bell Lawrie, said that, although he believed HBOS would not have agreed to the deal had it not been necessary, some of the criticism was "inevitable". He said: "HBOS is a totemic operation and we would expect some people to express discontent at its passing."

David Bell, professor of economics at Stirling University, said HBOS shareholders would be more likely to vote against the Lloyds TSB offer if other bids were put on the table.

• The chance of snap interest rate cuts was played down yesterday by Andrew Sentance, a member of the Bank of England's monetary policy commitee.

PROFILE

ALEXANDER von Ungern-Sternberg, below, is one of Europe's leading banking experts. Born in Germany in 1950, he went on to study history and economics at St John's College, Oxford, where he received an MA Honours.

He qualified as a chartered accountant with Price Waterhouse, where he worked between 1971 and 1978, then later joined Deutsche Bank, spending the majority of his career as a board member, group treasurer and then executive vice-president.

In 1995 he was appointed deputy chief executive of the markets division of Barclays, where he spent two years in charge of currency trading worldwide. In April 1997 he was appointed to the board of investment banking at Rabobank International, where he had responsibilities for global investments.

Today, he is founder and managing director of Euro-IB, a banking "boutique" based in London.

He is an ardent believer that corporate governance should not just be a rich men's club, and that firms need to reflect worldwide challenges such as sustainability.