Financial groups' merger plan to boost share prices

The share prices of Irish Life and Irish Permanent are expected to rise sharply this week as investors react to the news that the two groups are holding merger talks.

If the merger goes ahead, the combined group would be the third-largest financial institution in Ireland, after AIB and Bank of Ireland, and a major force in the personal finance market.

The groups are expected to issue a statement to the London Stock Exchange this morning, giving details of the talks, which are still at an early stage. The Dublin market is closed for the bank holiday, but the share price of the two groups is likely to increase in London today and in Dublin later this week as investors are expected to react positively. This will be good news for shareholders in both groups, among them the 140,000 in the Irish Permanent, many of them small Irish investors who received their shares when the group floated on the market four years ago.

While neither company would comment yesterday on a Sunday Times report that the talks were under way, it is understood that the two sides have been in discussion for some weeks. Teams led by the Irish Permanent chief executive, Mr Roy Douglas, and his Irish Life counterpart, Mr David Went, are trying to hammer out the terms of a merger. As the precise terms and structure of the deal have still to be agreed, the merger is not yet a foregone conclusion.

Irish Life is Ireland's largest life assurance group and sees Irish Permanent's branch network as a way of distributing its products, as well as gaining the other advantages of being part of a large and diversified financial grouping.

Irish Permanent would also see new growth opportunities opening up through a merger. Also, it would be vulnerable to takeover from the end of next year, when a rule forbidding any other shareholder from holding more than 15 per cent of its shares becomes obsolete.

To get round the 15 per cent rule, a merger of the groups would probably be structured as a takeover of Irish Life by the Irish Permanent, although Irish Life's existing shareholders would own the majority of the new entity as it is a much larger company, valued at about £1.6 billion by the stock market, compared to £800 million for the Irish Permanent. Now that news of the talks has emerged, other financial institutions could enter the fray and express an interest in either company, although Irish Permanent's 15 per cent rule provides it with some protection from unwanted advances.

If a plan is approved, both groups will argue that it is in the best interests of their shareholders as the combined group would be larger and more efficient and would immediately become a major force in the market. Some job losses would be likely as overlaps between the two operations are eliminated. Each employs about 1,500 people.

There would be no immediate impact on account-holders with Irish Life or on borrowers or savers with the Irish Permanent, although they would find themselves customers of a large financial institution offering a full range of banking and financial products.

Any merger would have to be approved by shareholders of both groups, by the Central Bank and by the Minister for Finance, who holds a special share in Irish Life which would allow him to veto any merger.

The Competition Authority would also be likely to be asked to examine and approve any merger.