Bank of Scotland ups NatWest bid to pounds 26bn

THE BATTLE for National Westminster Bank appeared to be heading for the endgame yesterday after Bank of Scotland (BoS) raised its offer to pounds 26bn and invited NatWest to join it at the negotiating table.

The move came less than 24 hours after Stephen Byers, the Secretary of State for Trade and Industry, cleared BoS's bid. It was clearly intended as a pre-emptive strike against its rival, Royal Bank of Scotland, which also has its sights set on NatWest.

However, by yesterday evening, with BoS shares having fallen sharply on concerns that it is now in serious danger of overpaying, analysts questioned whether BoS's tactics in not waiting for NatWest's defence could backfire.

Royal Bank of Scotland (RBS) had already partially stolen its Scottish rival's thunder by bringing forward an announcement that Sir George Mathewson, RBS chief executive, is to take over as chairman from Viscount Younger following the group's annual meeting in January 2001.

The curiously timed announcement was clearly intended to put paid to rumours that Lord Younger was seeking to restrain Sir George from mounting a counterbid for NatWest. Fred Goodwin will move up from deputy chief executive to group chief executive on the same date.

Bankers said that with Lord Younger's position as chairman no longer an issue, an agreed deal between RBS and NatWest that would leave NatWest's Sir David Rowland as chairman and Sir George Mathewson, chief executive of RBS, as chief executive would be much easier to achieve. Analysts said that by moving now, BoS may have just succeeded in delivering NatWest into the hands of RBS.

RBS, by virtue of its English branch network, has a much bigger overlap with NatWest and would find it easier to justify paying a higher price. It also has powerful friends in the shape of BSCH, the Spanish banking giant that owns 10 per cent of RBS and has offered to underwrite at least part of a cash bid for NatWest.

NatWest has until midnight tonight to post its defence document, while BoS has another week in which to move.

Tom Rayner, analyst at SG Securities, yesterday downgraded NatWest on the basis that BoS had offered as much as it could afford and RBS was likely to come in with a bid not much higher than 1,600p per share. "We think it is the last bullet in the gun. They have tried to get a knockout bid."

Mark Eady at Deutsche Bank also downgraded both NatWest and RBS. "RBS is the most likely victor for NatWest, since its upper limit is higher and therefore Bank of Scotland will be trumped."

BoS' new offer consists of 1.75 of its own shares and pounds 1.90 of loan notes for each NatWest share. That compares with an original offer of 1.6 shares and pounds 1.20 of loan notes. In addition, BoS has committed itself to paying NatWest shareholders a special dividend of pounds 1.20 next November out of the proceeds of its disposal programme.

Peter Burt, Bank of Scotland chief executive, said the bank would not issue any more shares, but reserved his right to increase the other elements of the offer. "We feel we have offered a very full and fair price. It is a very generous offer for NatWest shareholders and fair to Bank of Scotland shareholders," he said.

Following BoS's increased offer, NatWest shares rose by 3.8 per cent to 1,527p, but Bank of Scotland fell by 6 per cent to 720p. Royal Bank of Scotland also fell - but by a smaller margin of just over 1 per cent to 1,327p.

Speculation that an agreed deal may now be close was fuelled by City rumours that Sir David Rowland and Ron Sandler, Natwest's chief operating officer, were haggling for much of yesterday. Sir David was said to be in favour of throwing in the towel and calling RBS to seek an agreed deal, but Mr Sandler wanted to fight on. The bank decided late in the day to put out a statement rejecting BoS's raised offer as inadequate. There were also reports that Sir George Mathewson had been on the phone trying to persuade Sir David to agree to talks.

One banker said yesterday: "NatWest's goose is cooked. The only thing that was going to stop BoS was either a competition referral or a higher offer from RBS. We think NatWest is now going to get them in and negotiate with the two Scottish banks in parallel."

NatWest's dismissal of the revised offer said it undervalued the strength of NatWest's franchise and underestimated the extent of the risks involved in putting the two businesses together.