Lloyds nears Government deal - but at what price?

Lloyds is on the verge of tying up a Government guarantee - but could end up 70% state-owned...

Last Updated: 31 Aug 2010

The ailing Lloyds is set to agree a deal whereby the Government insures £285bn of its assets in return for a stake of up to 70%, according to today’s FT. Negotiations were due to conclude a week ago, but it sounds like the two sides have been haggling over the cost of the state backing. Today’s reports suggest that the Treasury is so concerned about the dodgy assets now on Lloyds’ books as a direct result of its HBOS purchase that it’s demanding a very high price. And that would make life very uncomfortable indeed for Lloyds’ boss Eric Daniels and his chairman Sir Victor Blank…

The FT reports that the Government wants to convert its existing preference shares in Lloyds into ordinary shares, just as it insisted on doing with RBS. In some ways this would be good for the bank, because preference shares are pricey – they rack up an interest bill of £480m a year. However, it would also increase the Government’s voting stake from the current 43% to about 60% - meaning the newly-formed Lloyds Banking Group would be majority-owned by the taxpayer.

But that’s not all. The Treasury has apparently taken a long hard look at HBOS’s rancid loan book, and decided that providing the sort of guarantee it has already offered RBS will be an expensive business – it’s likely to cost Lloyds another big block of B-shares, which pay out a dividend but don’t carry any voting rights. This would take the Government’s economic interest up by another 10% or so, leaving it with a total stake of about 70%. That’s a bitter pill for the Lloyds board to swallow, particularly since the bank seemed to be in relatively rude health before this disastrous HBOS deal.
Although this all remains unconfirmed, news of an imminent deal seems to have gone down well with the market this morning, with Lloyds shares ticking up about 6% (admittedly that's only about tuppence these days). But it will put serious pressure on Lloyds CEO Eric Daniels and chairman Sir Victor Blank, who (with a lot of help from Gordon Brown) appear to have hurried the HBOS deal through without really understanding what a dud they were buying. Although Lloyds has played down reports that Daniels has threatened to quit over the terms of this deal (perhaps realising its likely consequences), investors are already calling for Blank’s head to roll. ‘His move to buy HBOS has blown the bank up,’ one told the FT today.

So whether they finalise negotiations today or not, it’s likely to be an uncomfortable weekend for these two...

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