Terry Murden: HBOS merger is the only realistic option

A WEEK which should see HBOS effectively voted out of existence should also bring disappointment to those who last week threatened to have me paraded on The Mound and forced to eat my own words.

Campaigners who want Lloyds TSB's ability to sidestep the competition authorities declared unlawful also believe this column has failed to support the cause of independence for HBOS and that they will win their appeal against the Business Secretary's decision tomorrow, thereby forcing the merger partners to rethink.

Sorry, but when they face a Government QC armed with evidence from the Bank of England, the Financial Services Authority and the Treasury on why the competition rules had to be waived in order to avoid an even bigger banking calamity it is likely that m'learned friend overseeing the case will throw it out. It's not that I am against HBOS remaining independent, simply that the commercial arguments – as against the political and sentimental – tell me that the merger with Lloyds TSB is its best option.

Apart from the Merger Action Group, led by architect Malcolm Fraser and businessman Peter de Vink, the other persistent opponents to the deal – Jim Spowart and MSP Alex Neil – went on television on Friday night in a desperate attempt to persuade HBOS's UK-wide shareholders to vote against the takeover. These guys should think carefully about what they are doing.

First, while no one is pretending there will not be substantial job losses, their claim that it could reach 40,000 has been described by Lloyds TSB chairman Sir Victor Blank as ridiculous. More to the point, do they think that an independent HBOS would be immune from job cutting?

Royal Bank and Northern Rock, both state controlled, have axed thousands, with more to come. If HBOS was nationalised – the only other option apart from closure – it would follow suit. The Government would also dismantle it – as indeed RBS will be forced to asset strip in order to pay back the £20bn it owes the taxpayer. If the Treasury took the knife to HBOS one of the first bits to go would be the corporate banking operation in Edinburgh which has a shed-load of debt and a lot of employees.

Second, the Spowart-Neil axis has already failed to produce the rival bidder they promised. With no other bank prepared to take on HBOS it is clear that they would struggle to raise the capital required to finance it.

Crucially, HBOS has a loan book of some £670bn and it needed in the region of £270bn annually, essentially through deposits and the wholesale markets, in order to fund it. In HBOS's case, this money came mainly from the latter and, as everyone now knows, access to this normally cheap finance is no longer available.

The HBOS board, having weighed the options – and don't forget its shares were in freefall at the time – felt that the Lloyds deal offered access to these capital markets, not least because it is the only triple-A rated UK bank. It would also allow it to grow within a new "superbank". By contrast, nationalisation came with too many strings attached, a view also taken by Barclays.

While Chancellor Alistair Darling failed miserably to explain his own case when I pressed him on Thursday, the evidence suggests that all parties believed the merger to be the right solution for HBOS because its exposure to weakening markets was greater than was faced by its rivals. The much-derided short sellers who claimed they were shifting stock because the bank was in trouble, were probably right all along.

One final thought ahead of Friday's historic vote is that the RBS bailout does not guarantee its future independence. The bank could be under state control for some considerable time. When it emerges into the daylight, slimmer and cheaper, the hungry wolves of the banking world will be ready to pounce.

It is highly likely that 2008 will be the last year that either of the two big Scottish banks controlled their own affairs.


Curious timing for sale of Gatwick

BAA's Spanish owner Ferrovial is stepping up the sale of Gatwick airport with indicative bids expected by January 19. Apparently it wants to out-manoeuvre the Competition Commission, offering Gatwick as a sacrificial lamb before being forced to do so when the watchdog's final report is published in the spring.

But the decision to push ahead with the sale comes at a curious time. Passenger numbers at Gatwick have fallen, down by 10.3% in October, the worst performance of any of BAA's seven airports in England and Scotland. It will give potential buyers some ammunition in bidding the price down at what is also a difficult time to be selling any asset.

However, Ferrovial seems to believe that an early decision to sell Gatwick will encourage the commission to go easy on it when it makes its final demands. That could mean it retaining Aberdeen, Edinburgh and Glasgow – an idea that has the support of the Scottish business lobby as it is thought an integrated business would be more cost-efficient and willing to invest.