LLOYDS Banking Group is likely to have to offer a cut price deal on the 632 branches it is selling in order to lure all potential bidders back to the table.
City A.M. understands that one potential bidder, Hugh Osmond’s Sun Capital, is disputing the Lloyds’ estimate of how much it will cost to set up an IT platform to run the branches as a standalone bank. Sun Capital has not formally withdrawn from the bidding process – despite reports over the weekend – but has yet to be convinced at current valuations.
NBNK Investments, the buy-out vehicle headed by Lord Levene, bid £1.5bn for the branches recently, although the offer has a long list of conditions attached and is for a slimmed-down package of assets.
Sun Capital sees the branches as overpriced at £1.5bn. It is understood that Sun’s IT partner, Tata Consultancy Services, has put the technology costs of the project at £1.1-1.2bn, versus Lloyds’ estimate of £800-900m.
If Tata’s estimate is correct, it means that NBNK could end up paying above the branches’ book value of some £2.5bn to set them up as a viable new lender.
Under the terms of EU competition law, which mandated the sale, Lloyds must pay the start-up costs for any buyer. But the precise amount of those costs is open to negotiation.
As City A.M. revealed last month, the prospect of Lloyds even getting over £2bn for the branches have become increasingly remote.
In addition to the IT costs, the sale has been hit by growing economic turmoil, which has thrown doubt on Lloyds’ prediction that the branches’ funding gap would narrow organically by 2013, when the sale must complete.
Co-operative Financial Services, the third potential buyer in the running, is particularly concerned about the funding gap.
Lloyds’ economists slashed their own UK growth forecasts last week, which could potentially have an impact on the bank’s earnings and funding forecasts.
NBNK did not return a call for comment. Lloyds and Sun Capital declined to comment.