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Date: Monday 13 Oct 2008

LONDON (ShareCast) - Turbulent markets have convinced Lloyds TSB to revise down the terms of its offer for rival HBOS and raise £5.5bn of new capital, with HBOS raising a further £11.5bn.

The bank, which had offered 0.833 of its shares for each HBOS share, is now only prepared to offer 0.605 of its shares for each share in the Halifax-owner. HBOS is recommending the lower offer, which has been sanctioned by the Takeover Panel.

That values HBOS at around 114p a share, or just over £6bn, less than the 124p closing price on Friday. The deal was originally valued at over £12bn.

At the same time, an offer will also be made to HM Treasury to exchange their preference shares in HBOS for equivalent preference shares in Lloyds TSB.

Lloyds said it wants to raise a total of £17bn of capital, of which £11.5bn, made up of £8.5bn in ordinary shares and £3bn in preference shares bought by the British government, will be raised by HBOS and £5.5bn, including £4.5bn in ordinary shares and £1bn in preference shares, by Lloyds.

The government is buying 2.6bn Lloyds shares for 173.3p a piece, an 8.5% discount to Friday’s close, and £1bn of Lloyds TSB preference shares. Lloyds won’t be allowed to pay a cash dividend on its ordinary shares while any of the preference shares remain outstanding.

Lloyds said the revised terms and an £8.5bn equity capital raising by HBOS with the government at 113.6p per share, will result in the issue by Lloyds TSB of 7.8bn new ordinary shares in respect of the acquisition.

On bosses pay, Lloyds said it will ask its executive directors to take their 2008 bonus entitlement in Lloyds shares, which they wouldn’t be able to sell until December 2009, rather than cash, although they won’t be forced to.

The company also said there would be non reward for failure. “Where a board member loses the confidence of the board, they should be able to be dismissed at a cost that is reasonable and perceived as fair,” it said.

Today’s deal sees HBOS chief executive Andy Hornby and chairman Dennis Stevenson lose their jobs.

Lloyds is also committing to keep the availability and active marketing of competitively priced mortgage lending over the next three years at a level at least the same as that of 2007.

“The board has concluded that shareholder prospects in the enlarged group are more attractive than on a standalone basis,” said HBOS.

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