HBOS has been hit hard by the slump in property prices and deteriorating mortgage lending conditions. In order to raise capital the bank is expected to raise £9billion through issuing ordinary shares and another £3billion through preference shares underwritten by the Government.

HBOS’ large amount of equity issuance has made many Lloyds TSB shareholders unhappy with the acquisition terms that were agreed last month, when both banks first started negotiating a merger on September 17, before the most recent trouble in the financial markets.

Still, the revised deal comes as a surprise to investors as both banks reassured their shareholders until Friday that they would not go back to the negotiating table. The renegotiated ratio will give HBOS shareholders 0.605 Lloyds TSB shares per HBOS share instead of the previously agreed 0.833.

The reduction follows the news that both banks will get a combined £17billion from the Government under the recapitalisation programme in order to boost their finances, with HBOS set to receive a £11.5billion cash injection and Lloyds TSB £5.5billion after successful completion of the merger.

According to HBOS, this could entail a 43.5 per cent stake of the Government in the whole new group. However, experts hope that the merger and government funding will ensure the stability of the new banking giant.

Lloyds TSB’s takeover of HBOS will create a bank which holds one third of the UK’s savings and mortgage market. HBOS was formed by the merger of Halifax and Bank of Scotland in 2001 and is currently the UK’s largest mortgage provider with a market share of 20 per cent.

© Fair Investment Company Ltd