Italian bank to join battle for NatWest

SAN PAOLO-IMI, the Italian banking giant, is holding preliminary talks about joining Spain's BSCH and Royal Bank of Scotland in a pounds 25bn bid for NatWest.

San Paolo-IMI, which has played a major role in the consolidation of Italy's fragmented banking sector, has a cross shareholding deal with BSCH and does not want to miss the opportunity to establish a foothold in the UK, particularly given the huge prize that is represented by NatWest.

"We are obviously interested. We have close ties with BSCH and with CCF in France. Obviously it would be RBS management driving this in the UK," a source close to the Italian bank said.

The move would strengthen the chances of the Royal Bank being able to trump the pounds 22bn hostile bid for NatWest from its arch rival Bank of Scotland.

Emilio Botin, BSCH's co-chairman and Juan Inciniarte, the Spanish bank's chief executive, have been intimately involved with the discussions about a counter bid being held by Sir George Mathewson, the Royal Bank chief executive, with his city advisers Goldman Sachs and Merrill Lynch.

The Spanish are wholly supportive and have agreed in principle to raise their existing 10 per cent stake in RBS so that it is not diluted by a bid for NatWest. However, they may not be keen to go much further as analysts say the bank would need a rights issue in Spain in order to acquire, say, a 25 per cent stake in the combined RSB NatWest.

But the interest shown by the Italians suggests the two Mediterranean banks could join forces to take anything up to a third of the combined NatWest/RBS bank.

The Turin-based San Paolo is no stranger to Britain. The group used to have a large stake in Hambros, the City merchant bank, now part of Societe Generale. There are a number of UK institutional shareholders following the bank's flotation several years ago. The bank has close ties with some of Italy's most powerful industrial dynasties. The involvement of the Italians would be a serious blow to the hopes of Peter Burt, chief executive of the Bank of Scotland, in clinching the deal.

Mr Burt and his advisers have assumed that RBS would enter the bid battle with BSCH on its side. However, the BOS battle plans have assumed the Spanish would be reluctant to underwrite more than 15 per cent. But if the joint Italy-Spain axis were enough to underwrite 25 per cent or more, Bank of Scotland may have difficulty raising the fire power to come back with a higher bid.

Royal Bank is believed to be in a much stronger position to offer cost synergies. RBS has an extensive branch network south of the border and analysts stripping out the overlap could yield anything up to a billion pounds worth of savings in addition to the savings Bank of Scotland claims to be able to achieve through better management and eliminating duplication of head office and IT functions.

Bankers are expecting RBS to come in with a sighting shot of around pounds 16 per share well above the initial pounds 12.70 BOS has offered for NatWest. But analysts reckon RBS could easily go over pounds 20 a share without risking dilution to existing shareholders.