Lloyds TSB Group will acquire HBOS for about $22 billion to create a lender that controls more than a quarter of Britain's mortgage market, two people with knowledge of the decision said.
Lloyds TSB will pay about $4.20 a share in stock for HBOS, 58% more than its closing price Wednesday in London trading, said the people, who declined to be identified before an official announcement. Shares of Edinburgh, Scotland-based HBOS, Britain's largest provider of home loans, fell 19%.
HBOS, which lost almost half its market value this week, has been hurt by a shortage of funds to back its mortgages, leaving the company in the same predicament that led to the government bailout of Northern Rock a year ago. Prime Minister Gordon Brown discussed the fate of HBOS with Lloyds TSB Chairman Victor Blank as recently as four days ago, according to a person familiar with the meeting.
"The last thing they want is a Northern Rock rerun," said Julian Chillingworth, chief investment officer at Rathbone Bros., which owns shares of HBOS and Lloyds TSB.
Officials at the two companies declined to comment.
The government will seek to waive Britain's antitrust restrictions to permit Lloyds TSB's takeover of HBOS, said a person familiar with the matter. The two banks combined have a 28% share of Britain's mortgage market and a consumer banking network with more than 3,300 branches. Both companies earn more than 70% of their revenue from Britain.
Lloyds TSB Chief Executive Eric Daniels, 57, probably will run the combined group, making the future for HBOS Chief Executive Andy Hornby unclear, according to the British Broadcasting Corp., which was first to report the takeover talks.
HBOS, which employs about 72,000 people in Britain, was created in 2001 in the 9.7 billion-pound merger of Yorkshire-based mortgage lender Halifax and Edinburgh-based Bank of Scotland, whose roots date to 1695. Lloyds TSB employs about 58,000.
HBOS, which gets about half its funding from capital markets, has been under pressure since Lehman Bros. Holdings Inc. filed the biggest bankruptcy in history on Monday and New York-based insurer American International Group Inc. needed an $85-billion loan from the U.S. government to avoid failing.
"It is sad to see HBOS lose its independence in this way, but we needed a good, market-driven solution," said Richard Lambert, director-general of the London-based Confederation of British Industry. "Lloyds TSB is a strong, well-capitalized institution, and the new entity will be well placed to withstand the current turbulence."
HBOS raised 4 billion pounds two months ago in a share sale to shore up capital depleted by asset write-downs and the worst British housing market since the early 1990s.