Afternoon:
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Market report: afternoon update
All eyes in the City were on trading in shares of HBOS today as the price of Britain's biggest mortgage lender fell a further 19.6p to 153.7p.
The shares, the subject of several bear raids already this year, are now trading well below the rights issue price of 275p and the all-share terms from Lloyds TSB.
HBOS turned to shareholders for an extra £4 billion in the summer. But investors still worry the extra cash will not be enough to resolve the bank's problems. It was for that reason a shotgun wedding with Lloyds TSB was hastily arranged.
Even that has not calmed City nerves about prospects for the enlarged group. Most analysts acknowledged it had been a good deal for Lloyds, which was acquiring HBOS for a knockdown price, equivalent to 182p a share. But some brokers say the enlarged group could quickly find itself short of cash. One even forecast last week that the shortfall could be as much as £10 billion, unless conditions in the money markets improve dramatically.
The Queen's broker, Cazenove, joined the clamour today, warning Lloyds TSB, off 32p to 219p, would be better to take the plunge and raise cash now. The banning of short-trading means there is an absence of arbitrage activity. Cazenove says the chances of the bid failing are relatively low. But the damage to the HBOS shares should it fail would be “substantial”. “Therefore, on a weighted probability it still requires a meaningful discount and the terms may have to be revised,” it warns.
The broker expects the overriding principle in deciding the terms is that Lloyds will not pay a premium to book value. That is because there is no goodwill created by the deal.
“The size of the discount to book value makes no difference; the total equity acquired is unchanged. At the current share price, Lloyds' offer is worth £11 billion compared to our estimate of HBOS' tangible book value at 31 December 2008, of £21 billion. Therefore, Lloyds has headroom of approximately £10 billion post-tax in adjustments to fair value.
“The larger the fair-value adjustments the greater the capital deficit, and for which changing terms has no effect. In our view, Lloyds had done little detailed due diligence prior to announcing the terms and therefore in putting together the scheme document it may change its estimate of the fair-value adjustments.”
Meanwhile, shares of Bradford & Bingley were suspended at 20p before the start of trading to allow for its nationalisation and the disposal of the branches and its savings business to Banco Santander of Spain. Royal Bank of Scotland fell 43.6p to 164.4p, reflecting the €11 billion bailout of the Belgian bank Fortis, with which it teamed up to buy ABN Amro. Barclays also shed 33½p to 333p. Credit Suisse says any relief rally should be used to dump bank shares because the fundamental problem of cash and leverage has still not been fixed. The direct benefit of “unblocking troubled assets” from Barclays and RBS is small and any move by the Treasury to take a stake in either of them would dilute existing shareholders.
Shares generally fell sharply. The FTSE 100 index dived back below the 5000 level to its lowest since May 2005, with a fall of 213.9 points (4%) to 4874.5, of which financials and insurers accounted for more than 70 points. Imagine the damage to the index if investors had still been allowed to short bank shares. The wider FTSE 250 index lost 390.6 at 7883.8.
The miners were another big drag on the index. Xstrata lost 276p at 1636p, Kazakhmys 73p at 592p and Vedanta Resources 111p at 1185p.
The situation deteriorated this afternoon on Wall Street after Citigroup slashed its dividend in order to finance the acquisition of Wachovia. That left the Dow off 313.5 at 10,829.6.
