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19-07-2012 13:54:00

3rd UPDATE: Co-Operating Buys Lloyds Branches, Leaps into Big League

Relateret indhold

--Deal transforms Co-Operative into major bank player

--Lloyds Sells 632 branches for up to GBP800M, including earn-outs

(Adds government detail.)

By Max Colchester and Jessica Hodgson

LONDON--The Co-Operative Group (CPBB.LN) said Thursday it will acquire 632 retail bank branches from Lloyds Banking Group PLC (LYG), sealing a long-awaited deal that will transform the funerals-to-food group into the U.K.'s sixth-largest retail banking business.

The Co-Op agreed to pay an initial fee of GBP350 million for the branches, and a further GBP400 million in additional payments subject to performance of the group's business over a 15-year period. The figure is significantly below the GBP1.5 billion that was reportedly offered when discussions began a year ago, in part reflecting the decline in the value of bank assets over the period and Lloyds' desperation to seal a deal to appease European Union officials who ordered the sale after the bank was bailed out by taxpayers.

The British government hailed the deal as a way to boost competition in the U.K. banking sector and put pressure on the country's five largest banks to lend more. "This is another step towards creating a new banking system for Britain that gives real choice to customers and supports the economy," George Osborne, the U.K. Chancellor, said in a statement Thursday. The government also announced a package of actions to boost competition. These included a review of unsuccessful banking license applications to ensure that barriers to enter the U.K. banking market aren't too high.

The Co-Op, at a stroke, will acquire 4.8 million customer accounts through the purchase. Combining this with its existing branch network will give it around 1,000 U.K. bank branches and roughly 7% of all U.K. current accounts, up from its previous share of roughly 2%, the Co-Op said. The U.K.'s Independent Commission on Banking said a standalone bank needs to achieve 6% market share to compete with the likes of Royal Bank of Scotland Group PLC (RBS) and Barclays PLC (BCS).

Lloyds, which is 40%-owned by the U.K. government, had to sell the branches on condition of receiving state aid when it was bailed out in 2008. But the sale, code-named Verde, has been dogged by regulatory issues related to the experience of the Co-Op's board and the amount of capital the group would have to hold if it boosted its banking business.

Analysts said that Lloyds eventually came off worst in negotiations with the Co-Op. The U.K. bank sold the branches at 50% of their book value, said Mike Trippitt at Oriel Securities. However: "The likely headline loss on [the] sale must be seen in the context of the certainty of the transaction," he said. Lloyds said that its loss would be partly offset by a fall in the amount of capital it has to hold, as it sheds GBP24 billion of mortgages along with the branches.

The deal, which is still subject to regulatory approval and is unlikely to close before 2013. However a person familiar with the matter said that the bid had been cleared by the EU competition watchdog.

Co-Op is one of several businesses that are looking to skim off market share from established lenders with the promise of better customer service. Virgin Money, which is backed by entrepreneur Richard Branson, has 75 branches in the U.K. and plans to roll out a current account service shortly. Retail giant Tesco PLC (TSCO.LN) is also likely to join the fray next year. Metro Bank, the U.K.'s first new retail bank in 100 years, said it is targeting 125,000 customers by the end of the year and is on track to make a profit by 2014.

The Co-Op is the only "challenger" bank to have built up significant scale. The Co-Operative Group Chief Executive Peter Marks told reporters the acquisition would help deliver "the most significant development in high street banking in a generation," and offer U.K. consumers an alternative to an industry whose image he said had been "badly tarnished" during the financial crisis and by recent events.

Paul Pester, currently Verde CEO, will become CEO of the combined Co-Op banking business, subject to FSA approval, the Co-Op said in a statement.

At 0749 GMT, Lloyds shares were down 0.3% at 30 pence, broadly in line with the Stoxx Europe 600 banks index, which was down slightly.

-Write to Max Colchester at max.colchester@wsj.com

(Ainsley Thomson in London contributed to this article.)

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

July 19, 2012 07:54 ET (11:54 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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