M&A: Is UK Gov. going to nationalise banks after all?

The details of the UK bank rescue plan announced last week were in essence very simple:

1) the government would take preference shares. That would inject capital into the banks, and then the shares would be sold and with luck the government would make a profit on them.

2) the Bank of England would operate as a lender of last resort and put short term loans into the system at commercial rates

3) the Treasury would provide guarantees for inter-bank lending.

So far, so good - at least that's what the government thought.

But as we noted after the statement, it amounted to government support to Lloyds TSB in its purchase of HBOS, a purchase which had been approved, indeed encouraged, by ministers who had simply brushed aside competition law in order to approve it.

The price offered by LTSB became increasingly unrelated to the market value of HBOS as the price of all banks fell, and HBOS and RBS, in particular tanked.

Over the weekend, Treasury officials have had to face the unwelcome reality that giving LTSB money and that money being used for the purchase of HBOS is not politically acceptable - particularly as HBOS is itself going to be a recipient of government funds.

Indeed, there is even an argument that the support of HBOS, which would prevent its shareprice falling, may be illegal share support during the bid period.

As RBS adverts flashed by drivers in the Japanese F1 Grand Prix at Fuji yesterday in the only business that spends money faster than banking, and RBS launched an advertising campaign on regional satellite channel Astro during its coverage by Star Sports of the race, back at base, RBS was coming uncomfortably close to the line where its survival could not be guaranteed.

The Brown / Darling plan is in tatters as the government will now take direct shareholdings in the banks, taking majority positions, and despite the express undertakings given just 5 days ago in the press Brown / Darling press conference announcing the former plan, the government will place representatives on the boards of both companies, it is thought.

The Chief Officers' Network understands that the plan has been hatched in semi-secret and that an announcement today would make it look as if there is no major change. Indeed, that announcement has now been made - and included it in are:

a) non-specific amount to be paid to RBS for shares in sufficient number to give the government control

b) non-specific amount to be paid to LTSB / HBOS upon successful "merger."

These two alone will take up GBP37 milliard out of the 50 milliard that the government will have to borrow to support the sector. So the Treasury will disguise the support for the takeover as funding for the joint bank. That leaves just one question: will LTSB shareholders agree to a vastly inflated price for HBOS, or will LTSB have to find another way to structure the deal?

The problem now appears to be that it could be a merger of equals in that both are weak: one must question how that aids the financial sector.

HSBC and Barclays are not taking up the support, although they have joined the scheme.

And although the statement makes no mention of government appointed boards, there are broad hints that the promise will evaporate: the statement says "

the Government has agreed with the banks supported by the recapitalisation scheme a range of commitments covering:

...

• remuneration of senior executives - both for 2008 (when the Government expects no cash bonuses to be paid to board members) and for remuneration policy going forward (where incentive schemes will be reviewed and linked to long-term value creation, taking account of risk; and restricting the potential for "rewards for failure");
• the right for the Government to agree with boards the appointment of new independent non-executive directors; and
• dividend policy.

As these are matters for the Board, it seems that even measures short of outright intervention will come close to interference.

The full media release is available in BizNewsSelect (click tab above)