Royal Bank of Scotland said yesterday it would buy Britain's Birmingham Midshires, giving the building society's members an average £600 sterling handout.
But it stressed the £605-£630 million purchase of Britain's fifth-largest traditional home loan provider did not fulfil its ambitions.
"We do not regard this as a deal which transforms the Royal Bank group and we would be interested, if the right deal comes along, in the deal that would (transform the group)," Royal Bank chief executive, Mr George Mathewson told a telephone news briefing.
"In no way does this mean we would not be interested in a very much larger transaction."
Analysts and market makers were puzzled by an apparent volte-face by the bank, which said it would finance the deal "without recourse to an equity issue to shareholders as a whole" but within hours placed 33 million new shares with Scottish Widows. Royal Bank already has a strategic partnership with the life group, which now holds almost 5 per cent of its shares.
This placing led to a drop in Royal Bank's share price. After reaching a high of 633p, they had dropped 10.5p to 615p.
A market-maker said the placing, at 601p per share, had depressed the share price.
Banking sources said that, at some stage, the Birmingham Midshires acquisition would require some new capital and, given Royal Bank's close relationship with Scottish Widows, the deal made sense.
Birmingham Midshires' chief executive, Mr Mike Jackson, who will be offered a place on the Royal Bank board when the deal is completed in the second half of 1998, said the society's members would be "delighted". Job losses will be limited to around 300 as a result of the closure of a mortgage processing centre at Bracknell, in the south of England.
Birmingham Midshires Building Society has a 150-year-old mutual tradition. It is owned by its savers and borrowers. Around a million will qualify for Royal Bank of Scotland preference shares or cash.
Birmingham Midshires is following a route taken earlier this year by another building society, Bristol & West, which was bought by Bank of Ireland for £600 million.
Mr Mathewson dismissed concerns about Birmingham Midshires' relatively high cost/income ratio, stressing he was confident the level could be brought down to "competitive levels" by a combination of cost cutting and increasing volumes.
The deal is expected to have a neutral effect on Royal Bank's earnings per share in the first year and to be earnings enhancing after this. Mr Mathewson said Royal Bank did not anticipate any regulatory hurdles derailing the deal, which will bring its mortgage book up to £13 billion sterling, more than 3 per cent over the British market.
Royal Bank's corporate business has been growing strongly and there was a need to balance this by increasing its retail assets.
