Lloyds £4bn cash call as chairman search begins

Nick Goodway
19 May 2009

As Lloyds Banking Group began its search for a new chairman today, it launched a £4 billion fund-raiser to buy back the Government's preference shares.

The outcome of the massive share issue will determine whether or not Sir Victor Blank's replacement works for a state-controlled bank or one where the Government is merely the largest minority shareholder.

That could make a big difference to some of the City's great and good who are being touted as candidates after Blank's shock resignation yesterday.

Blank's position was always difficult after it became clear that the original Lloyds-HBOS merger go-ahead came from Prime Minister Gordon Brown at a City cocktail they both attended last autumn.

That position became untenable once it was clear the Government might oppose his re-election as chairman as early as next month's annual meeting.
Any incoming chairman would want the unequivocal backing of the Government's UK Financial Investments body, which looks after its shareholding.

But similarly a newcomer would see greater attractions in joining the bank if the Government stake is less than 50%.

The view from the City today was that Blank's departure should ensure the survival of chief executive Eric Daniels, who UKFI and other large shareholders believe should now see through the largest merger in banking history.

The list of runners for the chairman is headed by Lord Leith, who was appointed deputy chairman yesterday, but also includes former Standard Chartered boss Lord Davies, Northern Rock's Ron Sandler and Standard Life chairman Gerry Grimstone.

The new shares are being sold at 38.43p, less than half the current market price. The figure was based on Lloyds' price on 6 March when it announced it would buy back the preference shares. At this level, institutions are expected to snap them up.

That would stop the Government taking majority control of the troubled bank. If institutions reject the new shares issue, and the Treasury had to buy all the new shares, its stake would rise from 43% to 65%. But unless the stock market collapses in the next months, that is unlikely to happen.

Lloyds has the biggest shareholder base of any UK company with 2.8 million small investors thanks to the creation of HBOS through the merger of Halifax and Bank of Scotland. The share placing and open offer is likely to take little more than a month to complete.

An average small shareholder with 550 shares will be offered 340 new shares at a cost of around £130. Alternatively, they can reject the offer and receive a cheque based on the price at which the new shares can be placed in the stock market. At today's price of 94.4p — a rise of 5.2p — that would mean a cheque for £190.

Buying back the preference shares saves Lloyds £480 million a year in dividends on
the prefs, and also clears the way for it to
restart ordinary dividends possibly as early as next year.

ODDS ON THE RUNNERS AND RIDERS

LORD LEITCH
Just made deputy chairman of Lloyds, former boss of Zurich Financial Services 2/5

LORD MERVYN DAVIES
Ex-chairman of Standard Chartered, now minister for trade 3/1

LORD DIGBY JONES
Outspoken former trade minister and CBI boss 5/1

GERRY GRIMSTONE
Standard Life chairman 6/1

SIR DAVID WALKER
Long career in Treasury and banking 10/1

HARVEY McGRATH
Chairman of the Pru, respected former boss of Man Group 12/1

Source Cantor Index