Surface Ripples

The EU Steps In

The Times has reported that the EU Commission is likely to insist that Lloyds Banking Group hive off HBOS, which it rescued at great cost to the taxpayer. Should we be surprised?

There has been much discussion of Lloyds' takeover of HBOS with government support. Whatever one's views, this was a deal conceived under pressure and driven by forces of which we have yet to hear a full account. In "normal" circumstances, it would have never been allowed on competition grounds. However, with the government keen to avoid a repetition of Northern Rock-like queues with the attendant damage to Britain's reputation as a financial centre and beset by the worst economic and crisis for at least 20 years, it is little surprise that the deal was "waved through".

Prior to this, there were hints that Lloyds Banking Group would have to restructure to avoid accusations of being in a dominant position. Indeed, LBG announced on 18 May that the EU COmmission woudl be taking a close interest so the latest rumours should not come as any great surprise. What will be more difficult now is to unravel the work done and to manage the uncertainty that a disposal may create for both customers and staff. The EU needs to take here that it does not make the situation worse...

Whatever happens, assuming that HBOS can be spun off as a separate unit, any buyer will also have to repay the UK taxpayer's "investment" in it. This will already make it less attractive, but this is not to say that it might not attract buyers looking to build a long-term stake in the UK high street banking market. Already, Tesco has been named as a possible interested party, and it would indeed be a feather in Gordon Brown's cap if he could negotiate a sale at a profit to the taxpayer before the next General Election.

The EU Commission has one month left before it changes personnel, and there must be some question over whether it will manage to put anything through in this time. What is clear, however, is that LBG will have to shrink in order to avoid accusations of using government funds to gain a dominant market position. What this "shrinkage" will look like has yet to be decided, however, and we do not want to end up with the split costing even more than the merger!

Labels: Strategy

posted by William Martin @ 00:19