Royalties and Concessions

Banking crisis: Lloyds TSB in talks to buy HBOS

Wednesday September 17 2008 12:00 BST

HBOS, Britain's biggest mortgage lender, is locked in merger talks with Lloyds TSB after its share price plunged amid fears over its future.

It is understood that HBOS, whose share price plunged again this morning in panicked trading on the London stock market, approached its high street rival.

A deal could be agreed before the end of the day, although the talks are in the balance and there is no certainty that agreement can be reached over HBOS's future. The Lloyds TSB chief executive, Eric Daniels, will need to ensure that his own shareholders are able to get value from a deal, that any takeover would fit with his strategy and that a combination with HBOS would not weaken Lloyds TSB's overall capital position.

Lloyds TSB, which already owns mortgage lender Cheltenham & Gloucester, has weathered the credit crunch better than most rivals. Shares in the company gained almost 18% to 328.25p this morning.

Amid wild price swings shares in HBOS, which holds one in every five pounds of the nation's savings, more than halved to just 88p. The company's shares later soared to as high as 214p as news of the talks broke, with the BBC's Robert Peston reporting that Lloyds TSB could pay 300p a share. But they had plunged back into negative territory by 11.45am, down 2p at 180p, after Peston retracted his claim.

It was rumoured this morning that Gordon Brown was playing a part in the negotiations, in an attempt to avoid a repeat of the Northern Rock crisis. The prime minister's spokesman declined to say whether Brown has spoken to senior executives at either bank, telling journalists: "The PM speaks to all sorts of senior businessmen and financial figures all the time."

Vince Cable, the Liberal Democrat shadow chancellor, condemned the hedge funds who he claimed had undermined HBOS through short-selling its shares.

"They were only able to speculate because they knew HBOS had a government guarantee and would be bailed out by the taxpayer. If Lloyds hadn't stepped in, the government would have had to take over," said Cable, adding that other banks may come under threat.

HBOS, whose shares fell as much as 40% yesterday, has around 2 million shareholders following its conversion from a building society in 1997, when it floated at 774p.