Cracks begin to show in HBOS buy-out

SHARES in Halifax Bank of Scotland plummeted yesterday, fuelling speculation that its takeover by Lloyds TSB would be killed off.

About £1 billion was wiped from the value of the Edinburgh-based bank and analysts warned that, even if the deal did eventually go ahead, it could be for a bargain-basement price.

HBOS was among the biggest UK casualties of United States legislators' decision to reject a $700 billion (£380 billion) bailout plan. The bank's share price dropped 13.8 per cent to 122.4p yesterday – far below the 181p at which the Lloyds deal values them. Lloyds' own shares rose 4.26 per cent to 226.5p, and analysts said its shareholders would probably now reject the deal, unless the price was cut.

Overall, the London Stock Exchange did not see the type of bloodbath experienced in the US on Monday. And the Dow Jones average opened ahead of Monday's close after George Bush, the US president, insisted the bail-out bill was not dead.

Meanwhile, Alex Salmond, the First Minister, who has been enraged by the HBOS deal, held a series of talks with ministers, eventually flying to London to meet Alistair Darling, the Chancellor.

Mervyn King, the governor of the Bank of England, held talks with Gordon Brown. A Downing Street spokesman said the meeting had been "routine" and "they discussed the present situation, among other things".

Last night, Mr Brown said he was confident the HBOS takeover would proceed. The government will be desperate to ensure it does, as Downing Street was closely involved in its conception, relaxing competition laws to smooth the passage of the deal.

The Prime Minister said: "This merger between HBOS and Lloyds TSB is a matter of great detail. I'm confident, from talking to people involved, that this merger is going ahead.

"At the end of the day, it is a matter for shareholders, not a matter for government, and I believe that some of the issues that were raised at the beginning are being dealt with. I am pretty confident that both parties want to go ahead with this deal."

Asked if he would bail out HBOS if the deal collapsed, he said: "We have already dealt with this through helping the merger take place. We changed the competition law to make it possible."

Earlier in the day, as HBOS shares crashed, Alex Potter, an analyst with investment bankers Collins Stewart, said: "At the moment, the market is telling you it looks as though it's going to be re-priced in some way, but anything beyond that is speculation."

He said if he were a Lloyds TSB shareholder, he would knock back the deal.

Gurgit Kambo, an analyst with Numis Securities, said: "There are clearly some concerns. The uncertainty is if shareholders vote against it, then it won't go through."

Ian Gordon, of Exane BNP Paribas, said: "Given extreme market volatility, the market is pricing in an increased risk that the Lloyds acquisition either won't go ahead or that there'll be an attempt to renegotiate in Lloyds' favour."

Keith Bowman, of Hargreaves Lansdown, agreed the markets were exerting pressure on Lloyds to re-price the deal. He said concern among traders about weak banks – heightened by the US vote against the bail-out – had hit HBOS particularly hard. It is seen as being vulnerable to lending problems because of its exposure to the mortgage sector. Recent data showing a massive fall in lending had added to this.

Mr Bowman said the deal still had to be voted on by shareholders and was "not a foregone conclusion". He said: "HBOS still needs the deal. You could argue for the good of the UK banking system some deal is needed. It is the confidence factor. The deal, when pieced together, did help restore some confidence and, if we see it unravel, some of that confidence will disappear."

He said the end of the deal could mean the end of HBOS. "Whether the government has anyone in the background to sweep in is very difficult to say," he said. "I don't know whether there are overseas players, but there weren't any obvious ones a few weeks ago."

Roger Lawson, a director of the UK Shareholders Association, which lobbies on behalf of retail investors, said HBOS shareholders were already unhappy with the offer and would be "even angrier" if Lloyds reduced it. "The directors should not sell at that price," he said.

One HBOS investor said: "There is something about this deal that has never quite hung together. It started to look potentially over-ambitious when analysts began to circulate very large numbers for the amount of additional capital that Lloyds TSB might need."

But both banks stood behind the deal and shrugged off the concerns of the markets and analysts. An HBOS spokesman said: "This is the right deal for HBOS shareholders. We are already working on the integration planning process, and it is full steam ahead as far as we are concerned.

"Share price volatility in bank stocks is part of the menu at the moment. These are not normal times."

Lee Calder, of Lloyds TSB, insisted the bank was proceeding with the deal. When pressed on re-pricing, he said: "I cannot comment on any speculation that may be around.

"I am not aware of any changes to any diaries or to any meetings, including those involving Scottish organisations and ministers."

Ron Hewitt, chief executive of Edinburgh Chamber of Commerce, said: "This deal was always going to be over the long haul. It will not be surprising if there are variations in what is finally agreed. Our primary concern remains that, as far as possible, jobs are safe and the banking facilities are secure."

If the deal goes ahead, it will create a "superbank" with nearly a third of the UK mortgage market and more than £300 billion of deposits.

• Administrators at the British operation of the bankrupt investment bank Lehman Brothers last night announced 750 job cuts.