BANK of Ireland will announce early next week that it is acquiring the British building society, Bristol & West, probably for between £600 million and £620 million, the third biggest acquisition ever by an Irish company. Market sources believe an announcement of the acquisition may come as early as next Monday morning.
Bank of Ireland would make no comment yesterday on the expected acquisition. A spokesman for Bristol & West would make no comment on a possible bid from Bank of Ireland but said that a takeover is under "active consideration".
It is thought this is the society's preferred option, rather than converting to a public company or giving bonuses to members as a commitment to continuing mutuality.
The spokesman said that a takeover would be welcomed if it allowed the society to continue as a specialist Bristol based financial services organisation specialising in mortgages, savings and investments.
Bristol & West has been progressively disengaging from other financial services activities to concentrate on the core mortgage and deposits business.
Industry sources believe that, a takeover by a non British institution is more attractive to the Bristol & West management, as a takeover by one of the big British banks or building societies might simply end up as a cannibalisation of Bristol & Wests loan book.
Bristol & West, with its concentration in the south west of England would be a good geographic fit with Bank of Ireland's BIHM mortgage subsidiary whose business is concentrated in the south east. It would also complement BIHM whose mortgage lending is funded from the wholesale money market and not through deposit taking.
The expectation of a takeover of Bristol & West - the ninth biggest building society in Britain with £7 billion in mortgages - had little effect on Bank of Ireland's share price which was 2p higher yesterday on 426p. Market sources believe that Bank of Ireland is likely to fund the acquisition by looking to shareholders for funds, and will fund the acquisition from its existing resources and through debt.
The addition of Bristol & West's £8.5 billion in assets would boost Bank of Ireland's current net assets of £19.7 billion by 40 per cent, but it would also have a severe short term effect on Bank of Ireland's balance sheet.
Assuming that the £600 million involved is funded through debt, then Bank of Ireland's Tier One capital ratio one of the key measures of the balance sheet's capital strength would fall from the current 8.8 per cent to 5.2 per cent. The ratio would fall as the bank takes cash from its balance sheet to part fund the acquisition. The minimum Tier One capital requirement set by the Central Bank is 4.5 per cent but Bank of Ireland's Tier One would rise to around 5.7 per cent once the merger of the American subsidiary First NH with Royal Bank of Scotland's Citizens Financial subsidiary completes.
Bank of Ireland could possibly reduce the short term pressure on its balance sheet by raising funds in the market, but sources believe that a fundraising is highly unlikely, with little appetite from institutional investors for such a move.
While there was little response in the market to the anticipated acquisition by Bank of Ireland, the general response from analysts was favourable, although most did not want to be quoted ahead of the official announcement.
"The risks with Bristol & West are very low, it has a good asset book, low bad debts and there are synergies that can be developed with BIHM," said one Dublin analyst. He added, however, that while the risks may be low, the longer term prospects for Bristol & West may not be very exciting given its position in the second, division of British building societies.
