Bidding war looms for banks

A £7bn bidding war loomed last night in Britain's banking sector as two of the best known names on the high street were cited as takeover targets.

Woolwich, worth around £4bn, is believed to have received a number of friendly takeover approaches from other banks since it opened the doors to potential suitors last week.

Alliance & Leicester was regarded as being vulnerable if rival banks are successful in ending an exclusive arrangement its Girobank arm has with the Post Office. Girobank contributed £36m of its £252m of pre-tax profits in the first six months of the year.

Girobank, the former Post Office bank which A&L has owned since 1990, has the exclusive arrangement to handle business banking through post offices, much to the frustation of other major contenders such as Lloyds TSB and Barclays.

City sources believe Woolwich and A&L might be in the next wave of consolidation in the sector which has long been predicted and increasingly expected to build up in the coming months.

Both banks are protected against hostile bids for another two years under the terms of their conversion from building societies three years ago.

This does not prevent them entering into "agreed" deals, however, and if either did accept a friendly merger another bidder would then be free to launch a rival offer.

Woolwich, in particular, has been regarded as being likely to attract a range of interest given its perceived advances on the internet through its Open Plan, current account cum mortgage service.

Both Woolwich and A&L, like the other building societies which converted at the same time, are struggling with shares below their flotation levels.

Shares in Woolwich, boosted by intense takeover specuation in recent days, ended last night at £2.69, almost £1 below their flotation level.

A&L gained 11p to close at £4.99, still well below the £5.42 at which it entered the stock market.

Unveiling an 8% fall in interim profits Woolwich chief executive John Stewart said that there "was no point being silly about mergers" and that he knew that the City believed the bank needed to get bigger.

Since his remarks, Woolwich has been linked with Barclays, Royal Bank of Scotland and French insurance group Axa with which it has a marketing arrangement over its Open Plan account.

Some sources linked Woolwich as a potential suitor for A&L.

One leading fund manager said: "The negotiations over the Post Office could be painful for Alliance & Leicester, so it has to be in the frame for the Woolwich".

Woolwich, however, is unlikely to try to negotiate a deal with A&L after it apparently failed to reach a deal with its rival last year. There is concern that A&L has planned to boost its share of the small business banking market by capitalising on its special relationship with the Post Office.

The Post Office, while admitting that it is talking to other banks about ways to open up the network to business banking, has been careful to say that it wants to maintain its links with Girobank.

An A&L spokeswoman said: "Alliance & Leicester is not saying that the contractual relationship between the Post Office and Alliance & Leicester will end."