It will acquire 632 branches, the Cheltenham & Gloucester mortgage business and the historic TSB brand in a deal likely to cost in excess of £1.5 billion.
Peter Marks, chief executive of the Co-operative Group, will now enter exclusive talks with Lloyds over the so-called Project Verde assets after the tax-payer-backed bank said yesterday that the Co-op bid posed fewer “execution risks” than the rival bid led by Lloyd’s of London chairman Lord Levene.
If the talks are successful, the Co-op’s banking business will more than triple in size to more than 900 branches, to be the seventh-biggest bank in Britain.
The deal would also mark a major breakthrough for the mutual in Scotland, where it currently has just four branches. The branches being sold include 185 in Scotland. But it could potentially spell the end of the TSB brand, whose roots can be traced back to Dumfriesshire in 1810, although it is not clear what the Co-op will do with it.
Tim Tookey, who is running Lloyds until chief executive Antonio Horta-Osorio returns from illness in January, insisted both bids were “very competitive” but the face that the Co-op already operates a financial services business was in its favour.
“The board felt the execution risks associated with an existing player were likely to be less,” he said. “Clearly they are different entities and the Co-op is an existing player – it is a bank.”
Lloyds and the Co-op insisted there were no guarantees a deal would be struck and Lloyds will also continue to look into a stock market flotation if the negotiations fall apart.
It is hoped a decision will be made by the end of the March but Lloyds said it was confident of completing the disposal by the end of November 2013, as required under a European competition ruling. The assets being sold account for a 4.6 per cent share of the UK current account market and up to 19 per cent of Lloyds’ mortgage book. There are five million customers and an estimated 9,000 employees.
The Co-op Bank is headed by acting chief executive Barry Tootell, the former finance director who took over from Neville Richardson in the summer, but discussions with Lloyds will be led by group chief executive Marks, who also masterminded the takeover of Britannia Building Society in 2009.
“This is Peter’s strategy,” a spokesperson for the group said, before adding that the search for a permanent banking chief executive was ongoing although the group was in “no rush”.
NBNK, set up last year by Levene and supported by Lord McFall and Lord Forsyth, said it was “disappointed” at the decision, given that it offered a “compelling financial package and comprehensive execution plan for Verde”.
It added: “More broadly the company regrets that it was not given the opportunity to create a break with the past, delivering to the high street a well-capitalised, new challenger bank and brand devoted to providing the level of service that UK banking customers deserve.”
Marks said: “We think a combination of these branches and our own would significantly strengthen our position as a real challenger in relationship banking in the UK.”
Paul Mumford, senior Fund manager at Cavendish Asset Management, said: “The Co-operative is a credible buyer, and we can now hope that negotiations arrive at a decent price.”
The Building Societies Association welcomed the potential expansion of the mutual sector in the banking market. Director general Adrian Coles said: “Quoted banks often put the interests of shareholders above those of customers.
“All of our research shows that mutuals offer a better customer service – this change will markedly increase the number of branches in the high street that are more interested in customer service than shareholder return.”
Business Secretary Vince Cable said: “If successful, the bid will create a substantial new presence on UK high streets for a mutually-owned bank with high ethical standards and a track record of good service to customers.”
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