Allied Irish Banks is set to double the size of its Polish banking business at a likely cost of more than £300 million (€381 million). The Polish government has decided to have exclusive negotiations with AIB on the sale of 80 per cent of the Wroclaw-based Bank Zachodni, it announced yesterday.

AIB beat off competition from French banking group Societe Gen erale. Analysts said that to achieve this, AIB has probably had to pay at the upper end of the range of valuations placed on Zachodni.

No price for the Zachodni stake has been disclosed, but the likely figure of around £300 million is equivalent to about three times Zachodni's book value. This compares to the twice book value placed on WBK Bank, the publicly-quoted, Poznan-based bank in which AIB has a 60 per cent stake.

"The offer of the Irish investor was the more favourable in every respect in comparison to Societe's.

The Minister had no doubt on his choice," a source close to the Zachodni privatisation said. "All aspects of the offer were important, like the price and the prospect for raising the bank's capital, but I think mostly the price determined the ministry's decision," said the source. He added that the takeover was likely to be completed by the end of next month.

Since it built up a controlling stake in WBK in April 1997 at a total cost of £96 million, AIB has been trying to expand its Polish operations by bidding for other banks being sold off by the Polish government. AIB, however, lost out in tenders for the Cracow-based BPH Bank and also lost out in bidding for Bank Pekao, where a 52 per cent stake is to be sold to either Citigroup or Unicredito for in excess of £750 million. "It was hugely important for AIB to win exclusive rights to Zachodni and they really had to get it. It's an easy way to double their business in Poland, but if they frightened off Societ e Generale then they must be paying top dollar," said one analyst.

Zachodni is similar in size to AIB's WBK subsidiary. It has 182 branches compared to WBK's 165, while both groups' net assets are broadly similar at eight billion zlotys (£2.7 billion or €3.4 billion). WBK is, however, more profitable after three years under AIB management. It had profits last year of £48 million compared to £23.5 million at Zachodni. Zachodni has, however, indicated that net profits in the current year will almost double to more than £44 million. In the first quarter of this year, Zachodni's net profits jumped 35 per cent to £11.5 million.

There is little or no geographical overlap between the groups, with Zachodni's branches concentrated in the south of Poland around the city of Wroclaw, while WBK's branches are mainly grouped in western Poland around Poznan.

Analysts said that, assuming the Zachodni acquisition is completed, AIB will undoubtedly merge the two banking groups over time, although in the short term, the terms of the takeover will oblige AIB to retain the Zachodni name and identity. Significantly, WBK shares rose sharply after the Zachodni announcement on prospects of a merger between the two banks.

--(Additional reporting by Reuters)