Don't bank on it!

HBoS has published its circular to its shareholders ahead of asking them to vote the bank out of existence.

Couple of things I noticed - it talks about the hard times in the global market and insists that

As a result of these factors, HBOS sought to restore confidence and stability through negotiating the proposed transaction with Lloyds TSB, as announced on 18 September 2008.

That's not what Victor Blank said - he said they'd been at it for years.

The circular also says:

While it is possible that the Proposed Government Funding might be available in the event that the Acquisition does not complete there can be no certainty that this will be the case or as to the terms on which it might be available.

Even Darling's given up on this rotten chestnut and admitted that any qualifying bank can apply.

Then there's this bit:

the boards of HBOS and Lloyds TSB announced that they intended to participate in the Proposed Government Funding by committing to raise £11.5 billion of new capital to be raised by HBOS (consisting of £8.5 billion in ordinary shares and £3 billion in preference shares (before costs and expenses)) and £5.5 billion of new capital to be raised by Lloyds TSB

Lloyds TSB (the smaller bank) requires £7 bn if the deal doesn't go through - 27% higher than its needs if the deal goes through.

On 11 October 2008 the FSA gave a preliminary indication to HBOS that if the Acquisition were not to occur, it would require HBOS to raise £12 billion of additional capital

An increase of £0.5 bn, or 4% higher. HBoS, of course, has a larger asset base than L-TSB.

HBoS is a healthier bank than Lloyds TSB - even with its current problems. Don't take my word for it:

However, despite higher funding costs, net interest income from banking businesses has increased and HBOS’s Insurance & Investment business has made a good contribution.

Good news from HBoS against:

The Lloyds TSB Group continues to trade well and deliver good income growth from its relationship businesses in an immensely challenging period for financial services companies. However, the impact of market dislocation, insurance related volatility and higher impairments, particularly in Lloyds TSB’s corporate lending portfolios, has led to a substantial reduction in statutory profit before tax in the first nine months of the year.

In other words, parts of L-TSB are losing money while the profitable bits are struggling to stay so. If the takeover goes through Lloyds TSB will be a drag on HBoS.

There's also this wee snippet:

If for any reason the Scheme does not become effective, the share capital reorganisation described above will be reversed and HBOS Shareholders will retain their current holdings of HBOS Shares and any Open Offer Shares which they have taken up. In such circumstances, HBOS has covenanted to HM Treasury to apply to
the UK Listing Authority for the Open Offer Shares and the HMT Preference Shares to be listed on the Official List and to the London Stock Exchange for the Open Offer Shares and the HMT Preference Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities.

Good to see they're already prepared for the collapse of the deal and there will be some movement immediately after the collapse.

Anyone who, like me, wondered why HBoS directors were busy fending off alternative offers instead of seeking the best possible deal can find the answer in the Implementation Agreement:

Under the terms of the Implementation Agreement, HBOS has agreed to certain
non-solicitation commitments in favour of Lloyds TSB, including that HBOS shall not, directly or indirectly, solicit, encourage or otherwise seek to procure any competing offer for HBOS or enter into any inducement or break fee arrangement of any nature with any other party. Additionally, HBOS has agreed to pay Lloyds TSB an inducement fee (inclusive of value added tax, if any) of one per cent. of the offer value under the Acquisition (based on the Closing Price of a Lloyds TSB Share on the Business Day prior to the date of the occurrence of the relevant event set out below) if:
* the HBOS Directors do not unanimously and without qualification recommend the HBOS Shareholders to vote in favour of the Scheme and the resolutions to be passed at the HBOS General Meeting necessary to implement the Scheme or they (or any committee of the HBOS Directors) withdraw, or adversely modify, or qualify their
recommendation to HBOS Shareholders to vote in favour of the Scheme and/or the resolutions necessary to implement the Scheme at or prior to the HBOS General Meeting and the Court Meeting;
* at any time after approval of the Scheme by HBOS Shareholders at the Court Meeting but before the grant of the Court Orders, the HBOS Directors, in exercise of their fiduciary duties, decide not to proceed with the Scheme;

* without the consent of Lloyds TSB, HBOS withdraws the Scheme or takes steps to defer (or adjourn) the holding of the Court Meeting or the HBOS General Meeting or the Court Hearings to approve the Scheme to a date later than 28 February 2009; or
* a competing proposal is announced prior to the Scheme lapsing or being withdrawn, which competing proposal subsequently becomes or is declared wholly unconditional or is completed.

Yup, HBoS directors agreed with Lloyds TSB that they wouldn't fight for the best deal for their shareholders, staff, and customers. Meanwhile, Hornby makes sure he's OK with his deal to net him £60,000 a month if the deal goes through.