Shareholders could receive £550m from share buy-back

Bank of Ireland shareholders could expect to receive £550 million from a £1 billion share buy-back if the merger between the bank and the former UK building society Alliance & Leicester goes ahead.

Sources have indicated that the payout to both banks' shareholders - while not yet definite - may be part of the eventual merger plan, aimed at generating support from Irish shareholders in particular who might harbour doubts over A&L's apparent dominance of the merged group's top management, and A&L shareholders who might harbour doubts over the logic of merging with an Irish bank.

Alliance & Leicester has already received approval for its shareholders to buy back up to £740 million sterling worth of its shares while Bank of Ireland's annual general meeting next month will consider a proposal that gives the Irish bank similar powers. Based on their respective sizes, Bank of Ireland shareholders could expect to receive £550 million from any £1 billion buyback.

The fact that the corporate structure that will be put in place will allow both banks to maintain their respective stock market listings while pooling their assets in a central holding company is seen by analysts as a clear effort by A&L to reassure Irish shareholders that this merger is not a takeover of Bank of Ireland by the back door.

Under this model devised by J.P. Morgan for A&L and Warburg Dillon Read for Bank of Ireland, both banks will pool their assets in a central holding company, while Bank of Ireland and Alliance & Leicester would retain their respective stock market listings in Dublin and London. "This is a merger of assets, not of companies, and the only assets that Bank of Ireland and A&L will have individually will be their respective holdings in the central holding company," said one source.

The one big outstanding question, however, is where this joint holding company will be based. Some sources believe that Bank of Ireland will press for the holding company to be domiciled in Ireland as a quid pro quo for A&L - the junior partner in the merger on the basis of market capitalisation - getting the chief executive's job for its man, Peter White. An alternative is joint domicile - on the lines of Unilever or Allied Zurich - although such an arrangement would need to be cleared by financial regulators in Ireland and the UK. Chief executives of Irish and British operations would report to Mr White and the holding company board which is likely to split 50-50 between Bank of Ireland and A&L members, despite Bank of Ireland's slightly larger size.

Mr White comes with a reputation of 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 that Mr White is likely to be reluctant to embark on a major cost-cutting campaign in Ireland, given the political ramifications of such a move.

A&L, while diversifying away from mortgage lending in recent years through the acquisition of the British post office's Girobank, is still mainly a mortgage lender. The combination of A&L with Bank of Ireland's Bristol & West building society subsidiary in the UK will boost A&L/B&W's share of the British mortgage market to almost 6.5 per cent. It is likely that the Bristol & West name will go, with its operations absorbed into A&L's mortgage business.

But analysts have said that the logic of this merger of assets is not simply about creating scale and cutting costs. "It is a route to diversifying the combined group's income stream and capitalising on each other's strengths," said one analyst.

Apart from the added scale of combining the two banks' mortgage operations in the UK, A&L's huge list of depositors in Girobank offers fertile ground for the merged group to sell other financial products, particularly the savings and investments products produced by Bank of Ireland Asset Management and the bank's Lifetime life assurance and pensions subsidiary. A&L already has a small life assurance operation but has failed to capitalise on the huge customer base it has in Girobank.

Even if a large chunk of the merged group's surplus capital is used for a £1 billion share buyback, analysts believe that the merged group will retain a large war chest that will allow it to look at other acquisitions in Britain and continental Europe. The soon-to-demutualise Bradford & Bingley - already tipped as a possible target for Bank of Ireland -could be one possibility.

The proposed link-up with A&L and 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.

"It's difficult to see any downside in this arrangement for Bank of Ireland," said one source, who added that it seems to provide more benefits for Bank of Ireland than A&L.

"I think A&L would have been happier with a British merger partner but haven't found anything. Time will only tell if the linkup with Bank of Ireland is the right route," he said, adding that A&L may have to use some persuasion if it is to get the support of its major shareholders. The chances are, however, that the carrot of a £1 billion buyback will probably be enough to woo any wavering shareholders.