Shares in Bank of Ireland and its prospective merger partner, Alliance & Leicester, are expected to rise sharply when trading on the Dublin and London stock markets resumes today.
Both banks will issue statements to the London and Dublin Stock Exchanges this morning confirming that merger talks are in progress. Industry sources suggest the deal is close to completion, but the statement will say that the merger still has to be approved by the boards of both banks and by the UK and Irish regulatory authorities. How the merged institution would be regulated by the Central Bank here and the UK Financial Services Authority is understood to be the main issue remaining to be sorted out.
When the markets open, some analysts predict the shares could rise by over 10 per cent as investors rush in to buy both banks' shares due to speculation about a possible £1 billion-plus payout to shareholders through a scheme to buy back some of their shares at an attractive price, if the merger goes ahead. Based on their respective sizes, Bank of Ireland shareholders could expect to receive £550 million from any £1 billion buy-back, although reliable sources say a buy-back scheme has not yet been negotiated between the two banks.
The merger would add Alliance & Leicester's network to Bank of Ireland's existing Bristol and West operation and create Britain's eighth biggest bank with more than 500 branches and a combined market value of £13.5 billion (€17.2 billion). The merged entity will be 55 per cent owned by Bank of Ireland and 45 per cent owned by A&L, but the board membership will be equally divided.
Under the terms of the deal sources in London suggest A&L chief executive Mr Peter White will become chief executive of the enlarged entity. Bank of Ireland deputy chief executive Mr Pat McDowell will become his deputy.
Bank of Ireland group chief executive Mr Maurice Keane will step aside from his management role if the deal is finalised and become a non-executive director. The bank's governor, Mr Howard Kilroy, will assume the role of non-executive chairman of the new financial services group until his term ends next year, with Mr Keane expected to succeed him.
The board of directors of the new bank will contain an equal number of directors from both institutions.
Where the bank will have its headquarters is still being hammered out, with indications that it may be jointly based in Ireland and the UK.
A key issue which has still also to be agreed is how the merged bank will be regulated.
Discussions between Bank of Ireland and the UK Financial Services Authority - which regulates financial institutions in the UK - are continuing on the matter and may take some time.
A corporate structure will be put in place which will allow both banks to maintain their respective stock market listings. This will allow Irish shareholders to get shares and dividends in euros and pounds and their A&L counterparts to deal in sterling.
The arrangement is also seen as a clear effort by both banks reassure their shareholders the merger is not a takeover in which either will dominate.
A&L chief executive Mr White has a reputation for being a bottom-line cost-cutter, and analysts in London have been speculating on savings of £250 million sterling in the British operation of the merged bank alone. Given the almost total absence of overlap between Bank of Ireland and A&L in Ireland, it is clear that the UK operations will bear the brunt of Mr White's cost-cutting scalpel.
There might be scope for cutting costs in Bank of Ireland's core banking operations in Ireland, but sources believe Mr White is likely to be reluctant to go on a major cost-cutting campaign in Ireland given the political ramifications of such a move.
The merger is one of Europe's largest cross-border deals and signals a big shake-up in the Irish financial services sector.
Bank of Ireland will now become part of a group which is firmly targeting Britain for growth and expansion.
The scale of the merger has taken the market by surprise and is expected to be the first in a series of moves by the new entity to expand within Britain and, possibly, Europe.
The proposed link-up with A&L and its prospects for further expansion gives Bank of Ireland the opportunity to expand away from its dependence on the Irish market where growth prospects are limited, especially if the domestic economy does slow down in the years ahead.