Board of ACC decides on merger talks with the TSB

The prospect of a merger between ACC Bank and the TSB have been given a major boost after the board of the ACC decided in favour of merger talks with the TSB rather than trying to find an overseas partner to invest in the State-owned bank.

The decision by the board of the ACC has been warmly welcomed by the trustees of the TSB and intensive discussions between the two banks will now get under way with the aim of presenting a formal merger proposal to the Minister for Finance within a matter of months. It is understood that the two banks aim to have the formal proposal ready by early next year at the latest.

The decision of the ACC board means that it has abandoned plans for a link-up with an overseas partner such as Credit Agricole of France or the Dutch bank Rabobank, the option until recently favoured by it.

It also puts the ACC board in the same camp as its own staff, who have come out in favour of a merger with TSB and flotation, subject to employees getting a free 5 per cent stake and the opportunity to buy a further 9.9 per cent through an employee share ownership programme.

But while both banks are now in favour of the merger option, sources warned that many issues need to be addressed before a proposal could be presented to the Minister, especially in the area of rationalisation of the combined branch network and the jobs that would lost through such a rationalisation.

TSB is substantially larger than ACC with 80 branches and 1,100 employees compared to ACC's 50 branches and 550 employees. About 38 branches are in overlapping locations and some of these would be surplus to the requirements of the merged operation.

Banking sources believe that it is essential that a cost-reduction programme be hammered out in detail in the negotiations that are about to begin.

Both ACC and TSB are relatively high-cost operations with cost-income ratios in excess of 60 per cent and this cost base would have to be reduced substantially if the merged bank was to be attractive to the institutional investors who would be essential to a successful flotation.

Senior executives at both banks are understood to believe that at least some of the cost savings could be achieved through natural wastage and voluntary redundancies as well as the elimination of overlapping central functions such as head office administration and information technology.

A variety of other issues will also need to be hammered out in the negotiations - not least the management structure of a merged bank and a decision over who would fill the chief executive slot.

The two banks have already had preliminary discussions over the past six weeks and it is these that have led the ACC board to abandon its preference for a continental link-up and opt for a merger with TSB followed by a flotation.

Valuing a merged bank ahead of a flotation is difficult as much will depend on how successfully TSB/ ACC reduces its cost base and how successfully it re-brands itself as a bank focused on the smaller corporate and personal banking sectors.

TSB made profits of £22.1 million in 1997, a rise of over 10 per cent, while ACC boosted its profits by 13 per cent to £15.7 million in the same period.

ACC, however, has had an exceptionally strong first half to 1998 with profits up 38 per cent to £10.4 million.

The scope for cost cuts suggests that a merged bank could aspire to profits in excess of £40 million in the current year, given the buoyancy in the banking market at present. This suggests that the Government could expect to realise at least £500 million for ACC/ TSB based on the sort of profit multiples that apply to publicly-quoted banks, if and when TSB/ ACC is floated on the stock market in 2000 or 2001.