Lombard

Last updated: April 24, 2013 9:21 pm

Lombard: Lloyds-TSB deal flop

How viable will the 632-branch TSB Bank be?

Contractual obligation albums were recordings that rock bands produced to fulfil multi-record deals with music companies. It did not matter to them if the songs were rubbish. So one wonders how viable the 632-branch TSB Bank will be. This is the independent lender Lloyds plans to create through a stock market flotation, following the collapse of a plan to sell the business to the Co-Operative Group.

The contractual obligation driving events here is a disposal ruling from EU trustbusters. TSB Bank, like the standalone Sky News at one time contemplated by BSkyB, would be a pure artefact of regulation. “Arguably it would be a subscale entity, and that would be a challenge,” says Investec’s Ian Gordon.

Co-Op has walked away. This leaves the government’s plans to increase competition in the oligopolistic retail banking market in tatters. An attempt by Royal Bank of Scotland to sell a package of branches to Santander has also flopped.

The Rochdale Pioneers say they do not like the look of the UK economy. A £1bn capital deficit in the Co-Op’s existing banking operation is another difficulty, though it may be resolved by a slew of disposals. Co-Op does not appear to have tried to cut a better deal with Lloyds, having already shaken the loose change from the pockets of Lloyds’ boss António Horta-Osório in the initial negotiation.

But one person’s trash is another’s treasure. Bernstein analyst Chirantan Barua reckons TSB could be worth more to stock market investors than the imputed £750m cost to Lloyds of dumping it on the Co-Op, with £1bn as a putative floor price. He argues that politicians need new contenders in UK retail banking badly enough to make sure that spin-offs from established banks succeed. Add in the healthy returns on equity that weak competition can sustain – 11.3 per cent in the first quarter for Barclays – and the contractual obligation bank might just prove a hit.

Street fighting

Nothing says the end of a bidding war quite like an offer more than one-third higher than the original price.

Add an element of cash where before the deal was an all-share merger and, though the final shots have not yet been fired, it looks as if Kier has beaten Costain in the support services battle for May Gurney.

May Gurney is, of course, the real victor. The road repairer has not been valued at 315p a share – Kier’s offer price – for more than five years. Instead of being a poor substitute for an auction, the board’s recommendation of the original Costain deal has worked to turn Kier’s previous inchoate interest into a tangible offer.

Kier itself has paid up handsomely for control and can point to the greater level of annual synergies as justification. The genuine justification is whether the range and scale of the combined zoo facilities to street signs group can indeed win contracts that neither could alone.

It’s tricky for Costain. Coming back with a higher offer would risk charges of overpaying, especially when its due diligence suggested a price so much lower. More probably, it will quit the field, though after the failure to buy Mouchel, this would be the second transformational deal it has missed. Buying a bunch of smaller businesses is an alternative (and safer) way to bulk up. But if Costain didn’t have the concentrated presence of its two 20 per cent shareholders, it might wonder whether it should change its logo to a target sign.

Nespresso roasted

It’s enough to put Nespresso executives off their morning Trieste and Napoli limited edition. The High Court has ruled that a rival capsule can be used in its fiercely-guarded machine-and-pods system.

The unlikely figures storming Nestlé’s citadel are Dualit, makers of the UK’s retro-toaster of choice, who clearly have their eyes on more of the breakfast table.

Having gone to the trouble of creating a closed regime – be it printer ink or razors – any company naturally gets upset at the idea of losing captive consumers. But Nestlé’s predicament is particularly dark.

First, it risks losing out in an attractive business. The coffee capsule market is high-margin and fast-growing – an estimated $10bn this year and $14.5bn by 2017. Second, if customers can buy more cheaply and conveniently in supermarkets instead of visiting Nespresso boutiques, then Nespresso faces losing sales or following caffeine addicts into a low-margin environment. Neither option is as palatable as a coffee grand cru.

Nespresso is still deciding its next step. But if it reckons the game is up, there is one tiny consolation: the revenue loss can be offset by a lower spend on lawyers.

Lloyds/Co-op: jonathan.guthrie@ft.com

Other Stories: alison.smith@ft.com

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