Contact has intensified between the Government and executives from a US consortium eyeing up Bank of Ireland and ILP, writes Simon Carswell

MAULABRACKA IS a small, exotically named townland a few miles from Dunmanway in Co Cork.

Yet it's the name that has been assigned to a multi-billion dollar, mostly US consortium that includes private equity giants JC Flowers and the Carlyle Group, that is keen to take a large stake in Bank of Ireland and possibly a merged group comprising the State's second largest bank and Irish Life Permanent (ILP).

Contact has intensified in recent days between the Government on one side and on the other, senior executives from JC Flowers and two businessman who put the consortium together: Nick Corcoran and Nigel McDermott of Cardinal Asset Management.

Neither businessman returned calls yesterday seeking comment.

New York-based investment bank Sandler O'Neill is also involved advising the consortium at the US end. Bryan Turley of Sorrento Asset Management is also believed to be advising the group.

Bank of Ireland is the target but the prize is potentially a merger between that bank and ILP, with the consortium taking a take in the substantial married entity.

The share prices of both are languishing around €1, leaving them vulnerable to a private equity grouping like the Maulabracka consortium, which is willing to take a punt on Bank of Ireland, despite spiralling future loan losses and the collapsing economy.

ILP shed 19.9 per cent yesterday to close at €1.15, the company's lowest ever share price, valuing the group at just €318 million. Bank of Ireland is worth €1 billion.

Given that ILP said last week that the value of its insurance and investment business, which accounts for two thirds of the group, would be about €1.7 billion, or more than €6 a share at year end, it's no wonder that the Maulabracka consortium are eyeing it.

The Department of Finance is thought to be favourably disposed to mergers in the sector in a bid to strengthen the institutions further. The legislation laying down the State's €440 billion bank guarantee scheme allows the Minister for Finance Brian Lenihan to set aside competition law where he believes mergers could further safeguard the banking sector.

Mr Lenihan held talks yesterday with the chief executives of the six guaranteed institutions on measures needed to keep credit flowing into the economy so cash-starved businesses can't remain upright.

Given who the members of the Maulabracka consortium are, they could provide more than enough money to meet the estimated capital required to strengthen Bank of Ireland and inject sufficient cash (that the State will find hard to come by) to bolster the banks.

Bank of Ireland is estimated to need between €1.5 billion and €1.7 billion to bring its capital ratio to the 7 per cent core tier-one capital ratio - the key measure of a buffer to absorb projected bad debts - that AIB has set its sights on.

The consortium could also tap investors in the Middle East and the Far East given its connections. Competition issues, despite Mr Lenihan's veto, still remain.

The merged bank and Maulabracka taking a large stake in it would give a private equity grouping, intent on turning a substantial profit over three to seven years, a stake in a married bank that would have a massive share of the Irish financial services market.

The enlarged bank would control over half the life insurance market, 40 per cent of the Irish mortgage market - joining two of the State's top three mortgage lenders - and over 60 per cent of the domestic asset management industry.

Bank of Ireland has more than 12,000 staff in the Republic, while almost all of ILP's 5,000 employees work in the State. A merger could lead to significant job losses.

Both companies will plead vociferously with the Minister about the merits of remaining independent, despite the lingering concerns about Bank of Ireland's ability to raise extra capital to cover rising loan losses and ILP's over-reliance on the costly and turbulent wholesale funding markets.

Both banks declined to comment.

The arrival of the Maulabracka consortium and the fire-power it brings could ease a major headache facing Mr Lenihan who has repeatedly said that State investment in the banks is "a last option" and that the Irish banks must raise cash privately in the first instance.

Mr Lenihan admitted on Wednesday that the Government had received "informal approaches" from private investors. Contacts will likely move quickly to in-depth discussions.

Mr Lenihan gave his strongest hint yet that consolidation in the banking market was on the cards.

Asked yesterday whether his discussions with the banks would result in consolidation, he said: "I am not going into issues which are currently under discussion."

Contacts with such heavyweight private equity players will leave Mr Lenihan with a tough dilemma and it is definitely not a foregone conclusion that the Government will accept such a scale of private equity involvement in a bank or two merged Irish institutions.

He must weigh up the likely effect of any potential merger in the market as well as a scenario where he could hand a private equity consortium a controlling or at least a blocking stake in one or possibly two of the country's leading financial institutions.

The stakes are high.