RBS heads queue to launch rival NatWest offer

NATWEST LAST night faced the prospect of being auctioned off as Royal Bank of Scotland considered whether to follow its rival Bank of Scotland and launch a hostile bid for Britain's third biggest bank.

With the City still reeling from the audacity of Bank of Scotland's pounds 22bn bid key executives at Royal Bank of Scotland were being ordered back from holiday.

"We have been looking at the position of NatWest for some time and we are watching the situation closely," said an RBoS spokesman.

Bank of Scotland's move, which was in response to the lack of enthusiasm shown in the City for NatWest's pounds 10bn bid for Legal & General, the life insurance group, appeared to be a carbon copy of plans hatched but never executed by Fred Goodwin, RBoS's deputy chief executive, to bid for Barclays earlier this year.

The two Edinburgh banks are bitter rivals, and if BoS were to succeed in its takeover of NatWest, the RBoS would risk being left horribly exposed.

Bankers said that given RBoS's extensive English branch network, the bank would be able to deliver more cost savings and therefore be able to offer a higher price than BoS for NatWest.

Analysts have put the likely cost savings from an RBoS bid for NatWest at around pounds 1bn against the pounds 350 to pounds 450m analysts expect BoS's plans to streamline NatWest to yield.

BoS has virtually no overlap with NatWest. Instead it bases its offer on being able to run NatWest better than existing management can. Peter Burt, the BoS chief executive, is also planning to launch a programme of disposals of non-core business, which analysts believe could raise as much as pounds 4.5bn.

Analysts said that the only way NatWest could escape the BoS's clutches would be for someone else to bid. Bank of Scotland is offering 1.6 Bank of Scotland shares for each NatWest share and pounds 1.20 worth of loan notes.

The bid represents a premium of 20 per cent to the NatWest price on Thursday, although the premium is a more modest 7 per cent againt NatWest's price before the L&G bid was launched.

One City banker said yesterday: "There is a strong likelihood that Bank of Scotland will be the only fall guy. Either someone else bids or BoS gets NatWest at a snip. As far as NatWest is concerned its independence is gone. Its days are numbered and quite right too.

"However, the Scots will have much more in their backpocket," he added.

Another banker said: "The only way NatWest could fight this off is for Sir David Rowland, the NatWest chairman, to get rid of Derek Wanless [chief executive of NatWest] and announce a similar programme of disposals to the one Bank of Scotland plans."

Yesterday's bold move by the Bank of Scotland electrified the City sending share prices of bank stocks through the roof. Investors have been waiting for years for the kind of aggressive takeover bid that would force banks to cut costs. The banks' shares rose 5 per cent on average yesterday.

NatWest immediately rejected Bank of Scotland's offer claiming it undervalued the bank. However, the bank said it was adjourning the extraordinary meeting of shareholders planned for 6 October to approve the L&G bid.

"It is an audacious bid which I think most people like," said Ian McEwan at Lehman Brothers.

"It is about Bank of Scotland management replacing NatWest management. Bank of Scotland have done a pretty good job. They say they can knock NatWest into shape and they certainly have better credentials than NatWest's management."

Outlook, page 21

ARBS LOSE MILLIONS OF POUNDS AS L&G IS LEFT AT THE ALTAR

A LEADING City investment bank was rumoured to have lost up to pounds 100m yesterday following Bank of Scotland's bid for NatWest, writes Francesco Guerrera.

Market sources said the bank was one of a large number of arbitrageurs and hedge funds that lost millions of pounds following yesterday's jump in the NatWest share price. The investors had gambled on a sharp fall in the NatWest share price following its offer for Legal & General and were caught off-guard by the surprise bid from BoS.

The bid arbitrageurs, known as "arbs", make money by exploiting the difference in the share prices of the two companies involved in a takeover.

In the case of NatWest's offer for L&G, the arbs were "shorting" the bank's shares - borrowing shares they did not own and selling them on in the hope of buying them back at a later date - and bought shares in the insurer as a cheap way into NatWest.

However, yesterday's sharp rise in NatWest shares forced many arbs to buy the bank's shares at a much higher price in order to cover their borrowing costs.

Sources said that arbs rushed to sell L&G and buy NatWest straight after the opening. The arbs' scramble to unwind their positions caused a selling frenzy in L&G shares, which left the stock nearly 6 per cent lower at 180.5p in huge volume of more than 170 million shares.

BoS has made it a condition of its bid that NatWest abandons its merger with L&G and few believe that a deal that was already under pressure can go ahead, particularly now that NatWest has adjourned its extraordinary meeting to approve the offer.

There is speculation that foreign insurers, encouraged by the fall in L&G's share price to well below the 210p NatWest had offered, could launch a rival offer.

Both Aegon of Holland and Allianz of Germany are thought to have run their slide rule over L&G.

HOW BANK OF SCOTLAND'S pounds 22BN BID FOR NATWEST COULD SPARK MERGER FRENZY ACROSS THE FINANCIAL SECTOR

ROYAL BANK OF SCOTLAND

Extremely profitable, making it the most likely contender to launch a successful counter-bid for NatWest

The bank's previously failed bid for Barclays could be back on the cards if it does not make a rival bid for NatWest

The group has been trying to close a big acquisition for years, but its targets have always slipped from its grasp. Now it is determined to succeed

Predator

Expected to launch a counter-bid for NatWest to avoid being overtaken by Bank of Scotland

LLOYDS

TSB

Way ahead of the pack. The clear UK leader and the biggest player, having just completed its pounds 7bn takeover of Scottish Widows

Widely seen as needing to make a "transforming acquisition" to keep its position as UK's number one bank

The bank's management has always said it would not wish to sit on the fence and watch consolidation in the UK market

Predator

Competition problems could thwart a possible counter-bid for NatWest

BARCLAYS

Britain's second largest high street bank saw a 21 per cent drop in first half profits on charges from reducing its payroll

Recent problems with senior management mean the bank is in danger of being left behind in the consolidation race

Barclays' priority is to resolve its management hiatus and reduce risk in its investment arm after it was stung badly by the Russian crisis

Could go either way

RBS could return as a potential suitor, but Barclays is looking at opportunities and is widely tipped to buy Norwich Union

NORWICH

UNION

Low investment returns have held back growth in the group's main insurance and pensions businesses

Has long been flagged as a takeover target for Barclays, Lloyds TSB, RBS or a foreign insurer

The group has a good reputation in the intermediary market and is actively trying to grow its share of new sales. NU is also building its position in the Polish market

Prey

Chief executive Richard Harvey says he is committed to remaining independent, but for how long?

HSBC

The only true global player in the UK market. Looks very strong, backed with a market capitalisation of pounds 50bn

Considers the UK market too expensive to make acquisitions but can't sit back and watch consolidation in its own back yard

In May the bank said it would buy Republic New York and its affiliate Safra Republic Holdings. It is also said to be considering buying two Thai banks

Predator

Will concentrate on overseas expansion although it has the resources to bid for any financial services business in the UK

ROYAL AND SUN ALLIANCE

First quarter operating profit fell by over a quarter as the group lost business because it refused to cut prices

Seen as the next general insurer to be snapped up. An attractive target given its financial strength

Announced its intention to focus on its role as an independent financial adviser to exit from the commissioned direct sales and tied agency markets

Prey

CGU has cast its eye over the group, but the smart money is now on a European bidder from either Holland or Germany

CGU

First quarter sales of life insurance and pensions rose 27 per cent, led by sales of mutual funds in the UK

"Hurricane" Bob Scott, the chief executive, has performed remarkable feats of integration

The group has made public its intention to expand its life and savings businesses in central and eastern Europe. Deals on the continent can be expected

Predator

Looking to European expansion in partnership with SG. A bid for RSA is still possible

HALIFAX

Having swapped its status as UK's largest building society for the dubious privilege of being Britain's largest mortgage bank, Halifax is losing market share

Chief executive Jim Crosby is young and untried and has so far fought shy of mega merger deals

The bank is diversifying away from its traditional savings business to build up its insurance and unsecured lending arms

Predator

Huge pots of surplus cash make Halifax a potential bidder for almost everyone else in the sector

ABBEY

NATIONAL

The first British building society to list in 1989 is losing ground in its core mortgage market. Shares have taken a pounding this year

Abbey held talks with NatWest three years ago, but like other suitors couldn't agree a deal

The group is looking to diversify its operations to increase market share and regain ground on its competitors

Predator

After RBS, one of the strongest candidates to launch a counter- bid for NatWest

PRUDENTIAL

The Pru has enjoyed an increase in investment and insurance sales over the past six months as consumer confidence rebounded following interest rate cuts

Sir Peter Davis, chief executive, is instinctively a predator but may well be overtaken by events abroad

Has officially abandoned plans to buy a bank or building society. Instead, has bought market share by heavily investing in egg

Prey

Expected to stay out of the consolidation game for the time being