Pru sets sights on Halifax

PRUDENTIAL, the UK's biggest insurer, is lining up a pounds 36bn merger with Halifax, Britain's biggest mortgage lender, aimed at creating a financial services giant that would dominate the life, pensions and mortgages market.

It is believed that soundings have already been taken at the highest levels within both the Halifax and the Pru on whether a merger between the two companies should take place.

A deal would be struck on the basis of both companies coming into the merger as roughly equal partners. Halifax is valued at pounds 20bn, while Prudential's market capitalisation is pounds 16bn, although the company is in talks to establish ownership of up to pounds 3bn in shareholder assets within its life fund.

The two companies have a total of 45,000 staff and some cost savings could be expected as duplication of resources is ended. But analysts suggested yesterday that the scale of any job cuts and branch closures would not be anywhere as severe as a merger between the Halifax and a number of banks it has been linked with in recent months, including Barclays and NatWest, who offer similar retail banking services.

Neither Halifax or Prudential were prepared to comment yesterday. Sources said, however, that informal contacts, already aborted once before by the Halifax's refusal to entertain a merger, had taken place in the wake of the recent announcement that Mike Blackburn, chief executive at the Halifax, is to stand down from his post in January. His successor will be James Crosby, 42, presently the Halifax's director of financial services operations. Mr Crosby, who joined the former building society in 1994, spent 17 years working at Scottish Amicable, the insurer taken over by Prudential last year. It is understood that Prudential executives are highly impressed by Mr Crosby.

Halifax has recently come under pressure within the City for its inability to effectively spend the billions of pounds it was handed when it floated on the stockmarket last year. Its proposed pounds 750m takeover of Birmingham Midshires, now being voted on by Midshires members, also failed to impress.

A merger would create one of the UK's biggest financial services company, pitching the company into the same league as HSBC, owners of Midland Bank, and Lloyds/TSB.

It would give Prudential access to Halifax's 21 million-strong customer base, while allowing its salesforce to sell the Pru's products in the former building society's 840 branches.

Prudential would also offer its fund management expertise, adding Halifax's pounds 24.6bn to its own pounds 130bn worldwide. In return, Halifax would provide mortgages to the Pru's own customer base of over seven million. Its retail banking experience would also be used to help boost Egg, the fledgling telephone banking and mortgage business, launched last month.

However, problems could remain over how to integrate Scottish Amicable with its headquarters in Stirling, and Clerical Medical, a Bristol-based life insurer which also targets independent financial advisers and is owned by Halifax.

Alan Richards, a director at ARC Asset Management and an insurance analyst, said: "This is the deal we have been waiting for. The two companies would fit together well, while this is just the thing the Pru says it has wanted for a long time."

News Analysis: page 23