Business Context and Reporting Period
This filing (Form 6-K) dated October 13, 2008, announces revised terms for the acquisition of HBOS plc by Lloyds TSB Group plc and a significant capital raising exercise. The announcement is made in the context of unprecedented turbulence in global financial markets and follows discussions with HM Treasury regarding capital requirements to access government-backed liquidity provisions.
Key Financial Metrics and Capital Structure
- Capital Raising: A total of £17 billion in capital will be raised. HBOS will raise £11.5 billion (£8.5 billion ordinary, £3 billion preference), and Lloyds TSB will raise £5.5 billion (£4.5 billion ordinary, £1 billion preference).
- Government Subscription: HM Treasury will subscribe to approximately 2.6 billion new Lloyds TSB ordinary shares at 173.3 pence per share (an 8.5% discount to the closing price on October 10, 2008), raising circa £4.5 billion. Additionally, HM Treasury will subscribe to £1.0 billion of preference shares carrying a 12% annual non-tax-deductible coupon.
- Acquisition Terms: HBOS shareholders will receive 0.605 Lloyds TSB shares for every 1 HBOS share. This results in the issuance of 7.80 billion new ordinary shares by Lloyds TSB.
- Post-Transaction Ownership (Pro Forma): Assuming no participation in the clawback open offer, existing Lloyds TSB shareholders will own 36.5%, existing HBOS shareholders 20.0%, and HM Treasury 43.5% of the enlarged group.
- Capital Ratios: Following the equity placing and pro forma inclusion of HBOS, the enlarged group had a core Tier 1 ratio in excess of 8.5%.
- Dividend Restriction: The enlarged group is precluded from paying cash dividends on ordinary shares while the preference shares remain outstanding.
Material Changes and Trading Performance
The filing details trading performance for the third quarter of 2008 amidst market dislocation:
- UK Retail Banking: Captured market share, improved product margins, and delivered revenue growth exceeding cost growth. Profit before tax increased by a double-digit percentage.
- Insurance and Investments: Excluding insurance volatility, the division delivered good revenue growth and lower costs with a double-digit increase in profit before tax. However, market turbulence contributed to adverse volatility of £504 million in the third quarter (excluding policyholder interests volatility).
- Wholesale and International Banking: Profits were lower due to market dislocation of £384 million in the third quarter. Excluding this impact, relationship banking businesses achieved double-digit growth in profit before tax.
Guidance, Outlook, and Risks
- Strategic Outlook: The acquisition is expected to create a compelling business combination with strong positions in retail, corporate, and SME banking. Cost synergies are forecast to be significantly in excess of £1 billion per annum by 2011.
- Completion Timeline: The acquisition is expected to be completed early in 2009.
- Government Conditions: As part of the capital raising, the group committed to maintaining mortgage and SME lending availability at 2007 levels for three years. Executive directors are asked to take 2008 bonuses in shares restricted until December 2009.
- Risks and Contingencies: The transaction is conditional on shareholder approval, regulatory approvals (including FSA and Competition Commission), and court sanction. The filing includes extensive forward-looking statements regarding economic conditions, regulatory scrutiny, and the ability to achieve synergies.
Investor Verification Checklist
- Verify the final outcome of the shareholder votes required to approve the revised acquisition terms and capital increase.
- Confirm the receipt of all necessary regulatory approvals, specifically from the Financial Services Authority (FSA) and the Office of Fair Trading/Competition Commission.
- Monitor the implementation of the open offer allowing existing shareholders to claw back their proportionate entitlement to new shares.
- Assess the impact of the 12% coupon on preference shares and the dividend restriction on future cash returns to ordinary shareholders.
- Review the actual realization of the forecast £1 billion+ annual cost synergies post-merger.