How to buy a £1 for 60p

Robert Peston is on top form once again today with a superb analysis of why the Lloyds HBOS takeover will go ahead and why the stock market might be misreading the true value of HBOS shares…

Peston’s stamina is to be much admired - he must be exhausted after tracking the events of recent weeks (though there is still much reporting to be done).

Whilst the less-informed media take the easy route and simply speculate about the potential for the Lloyds HBOS takeover unravelling, Peston provides an informed and insighful commentary on why the deal will go ahead.

It is not just the political momentum which underpins the deal - i.e. Gordon Brown’s involvement.

It is the fact that HBOS and Lloyds TSB have substantially the same shareholder base. These are the key institutional investors such as pension schemes and other fund managers.  To an institutional shareholder with an investment in both HBOS and Lloyds TSB, it doesn’t really matter if the price being paid for HBOS is more or less than the current market value.  What lose on the roundabouts, they gain on the swings.

For an investor in only HBOS or Lloyds TSB the price of the deal does matter. But it only takes a 50% of Lloyds TSB shareholders to approve the deal.

Interestingly, it is currently possible to buy HBOS shares for around 125p compared with the 188p that Lloyds TSB will pay for those shares when the deal is approved.  Commentatores argue that this suggests the terms of the deal will be renegotiated in favour of Lloyds TSB (i.e. offer a lower price).  But as Peston argues, that isn’t necessarily true

Hmmmm

Jim

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