Calls for Lloyds TSB merger to be halted as rival proposals are outlined in letter
By Kenny Kemp

The Lloyds TSB-HBOS merger was dealt a major blow last night with the intervention of the twin pillars of Scottish banking - once fierce rivals in Edinburgh - who have joined forces in a bid to save HBOS. The news came as another corporate financier revealed another potential bid would be confirmed or otherwise in "seven to 10 days".

Sir George Mathewson, the former chairman of Royal Bank of Scotland, and Sir Peter Burt, the former head of the Bank of Scotland, have written to Lord Stevenson of Coddenham, the present chairman of HBOS, asking he and Andy Hornby, the chief executive, to step down immediately and hand over control to the Scottish pair. They have also turned the banking merger on its head by suggesting that it is a financially straitened Lloyds TSB, the smaller of the banks, that requires bailing-out at the expense of HBOS shareholders.

The pair - who began their private talks after the Sunday Herald revealed a plan hatched by MSP Alex Neil and Jim Spowart, the Scottish financier who has campaigned to save HBOS that senior Scottish bankers were seeking an alternative to the merger - say in their letter that: "HBOS could continue as a stand-alone bank certainly no weaker than Lloyds and one with a better chance of securing the crucial necessary liquidity to service its existing and new customer base than the proposed enlarged group."

If Stevenson and Hornby refuse, the pair intend to canvas shareholder support for an extraordinary general meeting to seek their removal from the board and the appointment of Mathewson, 67, and Burt, 64. The Sunday Herald understands Lord Stevenson is unwell, so the matter is expected to be dealt with by deputy chairman Sir Ron Garrick, former chairman of Glasgow-based Weir Group.

Shane O'Riordan, head of communications at HBOS, said: "We have received the letter on this matter from Sir Peter Burt and Sir George Mathewson and we have reviewed its contents. The letter does not contain any substantive bid for HBOS and we believe that the offer on the table from Lloyds TSB provides significant prospects of returns for HBOS shareholders."

The letter refers to the circumstances of September 18, when the chancellor of the Exchequer, Alastair Darling, intervened by waiving competition rules to allow Lloyds TSB to rescue HBOS. "It is now clear that it was not just HBOS that was in an extraordinary difficult position - a number of banks were, including Lloyds. That information in itself should have promoted the HBOS board to urgently consider alternative plans," says the letter.

"Relative to their respective sizes, Lloyds now appears to require greater support than HBOS. Lloyds has announced that if the takeover does not process, a stand-alone Lloyds will be required by the Financial Services Authority to raise further capital."

The letter says Lloyds would need £7 billion of new capital, equal to 63% of its existing capital of £11.1bn, while the £11.5bn required by HBOS was 54% of the £21.1 billion capital.

The intervention came as a corporate financier behind another potential bid for HBOS said he expected a decision to be made within "seven to 10 days" about a major move from an un-named foreign bank.

Tim Goode, the former treasurer of RBS, who was previously head of treasury and capital markets at the Halifax group, has emerged as a key figure behind a potential bid for HBOS.

His London-based investment-banking group European American Capital has been advising an overseas bank believed to be considering a counter-offer to the bid from Lloyds TSB.

"The discussions are serious but preliminary. There is no deadline on this but it is reasonable to expect a decision in the next 7-10 days," said Goode.

Goode has been working with Spowart. Last night Spowart, speaking of the letter, said: "This is unprecedented in banking circles. Two of the most successful Scottish bankers of their generation have come out with a strongly-argued letter which the HBOS board can't ignore. My aim has always been to look at sensible options so I fully support and endorse what Sir George and Sir Peter are doing."

Goode told the Sunday Herald that the next steps are for his clients to either say they are not taking this further, that they have serious intentions in the UK but now is not the time, or else take this to the next level - and a possible bid.

He stressed that, in the normal world of banking, takeover discussions continued all the time. He felt that because of the high public and political interest, these talks had been revealed before a decision was made. Goode said he could understand that people were keen to know if there was real substance, but that preparing a financial option took time. When asked if he had been in discussion with Mathewson, Goode confirmed that he had recently spoken to the former RBS chairman.

But O'Riordan poured cold water on the activities: "There has been talk about another bid for a week and we haven't had anything substantive. This is a serious matter and not a plaything. HBOS is a really big bank with £700bn of assets across the UK alone - and 1.5 million savers.

"There are very few institutions that could handle this kind of business. We are the biggest mortgage lenders in one of the top five economies of the world, there are only a handful of big global banks capable of taking this on."

"Of course, HBOS is duty bound to look at any substantive proposal. But the present deal with Lloyds TSB is the only one on the table. It is a recommended deal and both sets of shareholders are being advised to accept the deal."