Pressure builds on Barclays over ABN

ABN Amro shares hit record highs on Monday, piling more pressure on talks between the Dutch bank and Barclays, of the UK, as they race to agree a merger within 48 hours while fending off a rival three-way proposal from a consortium led by Royal Bank of Scotland.

ABN Amro’s share price surged more than 6 per cent to €35.76 as investors anticipated the possibility of a higher bid from the rival consortium and approved profit figures that were released ten days early. Barclays’ shares also rose, trading 1.1 per cent higher at 751½p - off earlier highs.

The share movements increased the likelihood that the Dutch bank’s board may be forced to recommend to shareholders a deal with Barclays that values the bank at less than its current share price.

That is is one reason why ABN Amro and Barclays are understood to have revived discussions on a deal that would include the possibility of a partial break-up of ABN Amro, with the Dutch bank’s US retail banking operations a candidate for divestment. Such a move would release additional immediate value for shareholders.

The banks are understood to be working towards a merger announcement on Wednesday, when a period of exclusive talks with Barclays ends. However, it is unclear whether that goal will be achieved, with decisions awaited on some key issues including regulatory oversight.

Another outstanding issue involves the settlement of a US criminal investigation. The Dutch bank said on Monday it was “actively exploring all possible options” to resolve a US Department of Justice criminal inquiry into dollar clearing activities.

The affair relates to unlawful Middle East money transfers in a period before 2004, for which ABN Amro was fined in late 2005 by US regulators.

The Financial Times reported on Friday that ABN Amro was negotiating a settlement, likely to involve a financial penalty without accepting liability of admitting wrong-doing. Barclays has made clear to ABN Amro it would be uneasy about agreeing a merger before the affair was resolved.

The key to clinching the deal is price. “There are other matters that need a decision but they are not deal-breakers. Price is the only deal-breaker,” a person close to the matter said.

The discussions have been lent a new urgency by the break-up proposal put to ABN Amro on Friday by RBS, Santander of Spain and Fortis, the Belgo-Dutch banking and insurance group.

The consortium, which believes it could offer more than Barclays, is seeking access to ABN Amro’s accounts. In its letter to the boards of ABN Amro it asked for the same due diligence information as was given to Barclays and expressed its “preference to work with ABN Amro to make an offer to ABN Amro shareholders”.

Analysts at Keefe, Bruyette and Woods estimated the consortium could offer close to €40 a share for the Dutch bank, topping the €35 bid Barclays is thought to be close to making.

In a note to clients KBF also said it thought other bids for ABN Amro were possible. It named ING, Bank of America and Bank of Montreal as a possible rival consortium to RBS, Santander and Fortis.

In conclusion, KBF said Barclays faces an uphill struggle if it is to buy its Dutch rival.

“Barclays will need to go back to the drawing board and consider either selling some ABN assets in a competitive tender or construct its own consortium,” it said.

“However, at some point the bank might decide that a fight for a smaller piece of the action is not worth while,” it added.

Investors welcomed the interest RBS is showing in its Dutch rival, sending shares in the Scottish bank nearly 3 per cent higher to £20.77. Santander shares were also higher at €13.87, up 0.5 per cent, but Fortis shares fell 1.7 per cent to €34.20.

Meanwhile, The Children’s Investment Fund, which has just under 3 per cent of ABN Amro’s shares, has threatened legal action against the bank’s supervisory board if it does not give the consortium access to the same information as Barclays.

“If other potential bidders are not allowed to do due diligence, [the board] is in breach of its fiduciary duties,” said Christopher Hohn, managing partner at TCI.

The rival consortium has given little indication of how an offer might be structured, though analysts say this will involve ABN Amro shareholders receiving cash as well as shares in two or three of the bidding banks.

ABN Amro is thought to be sceptical about opening up the bank’s books to direct competitors when there is no certainty they will make an offer. It said it would consider the letter from the consortium but reiterated that its talks with Barclays were exclusive.

The decision to release first-quarter results on Monday, ahead of schedule, was taken “in the light of recent developments and in order to be fully transparent”, ABN Amro said. The bank unveiled a 30 per cent rise in earnings per share to 65 cents and said: “We are well on our way to beating the 2007 EPS target of €2.30”.

The first-quarter saw net operating profits increase by 25.5 per cent to some €1.23bn year-on-year. Net profit rose 29 per cent to €1.34bn, aided by €114m of gains from disposals in the US. Revenues grew in all regions.

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