Dividend relief for Lloyds shareholders?

Lloyds TSB (LLOY) plans to resume its dividend payments to

shareholders by 2009, the group announced on Monday.

The banking giant, which will merge with HBOS (HBOS) in the coming months, said it intends to repay the Government's preference shares during 2009. This means shareholders could be in for a dividend payment in the latter half of next year if the debt is repaid by August 2009. 

Lloyds is seeking an extra £4.5 billion by offering 2.6 million new shares to existing shareholders at 173.3p each. The Government is taking £1 billion in preference shares and will also buy up the remaining new shares.

However, with market conditions remaining tough, third quarter profits at the group's wholesale and international division dropped by £270 million due to credit-related write-downs. It also expects to write off a further £300 million in the second half of the year due to more bad loans to businesses.

Merger partner HBOS was also suffering the effects of the financial turbulence with write-downs and losses on bad debts for the first nine months of the year climbing to £5.2 billion up by £2.7 billion from the end of June. It is now looking to raise £8.5 billion through the sale of new shares with the Government taking up £3 billion in preference shares.  

Chris Alexander of Fortis Private Banking says: "On the issue terms, Lloyds new shares are being issued at a far from risk-free 10% discount to the current share price; new HBOS shares are being issued at a 10% premium to the current share price, but at a 3p discount to the value implied by the Lloyds share price. The outcome of the HBOS fund raising and share price performance is wholly dependent on Lloyds share price - unless - as suggested in the media over the weekend, a third party makes an offer for HBOS." 

Weekend reports that a major European institution is planning a rival bid to scupper the merger between the two banks were denied by HBOS. However, Jim Spowart, the former director of HBOS' Intelligent Finance unit says he has been in talks with Scottish secretary Jim Murphy to find an alternative buyer to safeguard Scottish jobs.

Joshua Raymond of City Index says: "Much has been made of this mystery second bidder waiting in the wings to trump Lloyds for HBOS. What we do know is that it is a European bank and much lobbying work has already taken place. Remember though that Lloyds have the government behind them and much of the ground work has already taken place. 

"However, there have been renegotiations between Lloyds and HBOS as share prices have slumped and should this European bank not require government capital to succeed in any takeover, shareholders may well face a difficult choice of preference. There is a big 'if' here though and we must wait for the picture to become more transparent."

Unions fear that the tie-up could lead to as many as 20,000 job losses. The majority of the HBOS board have already been told they will not be making it to the boardroom of the enlarged group, which will be called Lloyds Banking Group.

On Monday, Lloyds said the acquisition would allow cost savings of £1.5 billion a year  - up from a previously anticipated £1 billion. It is sending out a circular to shareholders today confirming its offer of 0.605 Lloyds shares for every HBOS share. Initially HBOS shareholders had been offered 0.833 Lloyds shares for each HBOS one before HBOS' share price plummeted.

Have your say

Investors on the Interactive Investor discussion boards were largely willing the merger to go through.

On the HBOS board, NothingGained says: "If a large international group takes over HBOS, where does that leave lacklustre Lloyds - probably out in the wilderness, alone and facing a strong RBS, HSBC, Santander and worst of all maybe another of the world's largest banks with ambitions in the UK.

"It may finally dawn on Lloyds management and shareholders what a terrific deal this is for them. Can Lloyds really afford not to buy HBOS? There may be a huge price to pay in lost market share if they don't. Also HSBC and some other international banks are big enough to swallow Lloyds - so they could become prey instead of predator."

Tzaddiqim adds: "if there was [a rival bidder] it would do good things to HBOS and bad things to Lloyds. If the merger goes through, and I think it will, then both win..."

But on the Lloyds discussion board, Spain Fund counters: "Why can't Lloyds just raise £6.5 billion in their own rights issue, forget HBOS and keep our dividends? How can the HBOS deal be beneficial to LLOY shareholders especially folk who bought the shares for the dividend?"