Lloyds TSB set to spin off chunk of pounds 1.5bn Abbey Life

Lloyds TSB Group yesterday announced a long-awaited pounds 1.5bn deal to buy the remainder of Lloyds Abbey Life, its insurance arm. But City sources suggested Lloyds is poised to spin off a large part of the company in an pounds 800m trade sale.

There was speculation that Prudential is the most likely bidder for a demerged Abbey Life, the business Lloyds bought in 1988 to combine with its own insurance operations.

Lloyds TSB has been faced with the persistent problem of how to unify the different insurance businesses it owns through Lloyds Abbey Life and TSB, ever since the merger between the two banks at the end of last year. TSB was already a big player in the life assurance industry and City sources said selling Abbey Life would help the bank resolve the dilemma.

Lloyds TSB released few details about the deal reached yesterday, but said it would make further information available next week.

The deal valued each Lloyds Abbey Life share at 635p, excluding any tax credit. Lloyds Abbey Life shareholders will receive six Lloyds TSB shares for every seven Lloyds Abbey Life shares plus 300p cash for every Lloyds Abbey Life share.

Lloyds Abbey Life is contributing 50p of the 300p through a special dividend.

Selling Abbey Life would leave Lloyds TSB with the parts of the venture it put into Lloyds Abbey Life when it was formed in 1988. That would leave Lloyds TSB with Black Horse Financial Services and other businesses in insurance, estate agency, personal finance and unit trusts.

The bank would then be able to deal with its main priority which is to capitalise on TSB Life, a well-known brand name in Scotland, and Black Horse Financial Services.

One source insisted Prudential was the obvious partner for the remaining Abbey Life business, which primarily sells pensions and life insurance.

Prudential, sitting on a pounds 1.75bn cash pile and known to be on the hunt for acquisitions, is regularly among the market's favourites canditates to launch takeovers.

Lloyds TSB was rushed into making yesterday's announcement after heightened speculation about the fate of Lloyds Abbey Life on Thursday sent the insurer's share price 11.5 p higher to 592p.

Yesterday Lloyds Abbey Life's share price hit a new high before falling back to 621p, up 29p. Lloyds TSB share price slipped 12.5p to 378.5p.

"The share price is off because they [Lloyds TSB] appear to have paid a full price," one banking analyst said.

Robert Law, banking analyst at Lehman Brothers, said the deal was positive, and would be earnings enhancing to Lloyds TSB. Hugh Pye, at BZW said: "It clears up an untidy situation by integrating the businesses and cutting out a lot of costs."

Lloyds TSB also ended months of speculation about its future management structure yesterday by announcing Sir Brian Pitman, its chief executive, would become chairman in February next year when Sir Robin Ibbs retires.

Sir Brian, 65 in December, joined Lloyds in 1952, taking over as chief executive in 1983.

Peter Ellwood, 53, his successor as chief executive, played a key role in the merger between Lloyds and TSB. He was group chief executive of TSB and streamlined the troubled bank, taking its profits to record heights and also boosting the quality of its earnings.

"The Ellwood/Pitman duo is a pretty impressive one for the future," said Mr Pye.

Mr Ellwood is expected to work well with Sir Brian, who is reluctant to release his grip on the bank to which he devoted much of his working life. One source reckoned Mr Ellwood was under no illusions. "It wouldn't work if he [Ellwood] thought he was really going to be running the show," he said.