Lloyds Banking Group PLC (LSE:LLOY) is expected to be among the bidders for specialist lender Aldermore, with analysts at RBC Capital Markets valuing the target at around £1.4 billion and calling the deal financials "very compelling".
FirstRand, the South African group that owns Aldermore, said in its full-year results that the sale process has begun, with non-binding offers due by the end of September and final binding offers by December.
FirstRand put its UK division up for sale in April, and Sky News reported in June that Lloyds was exploring a takeover and preparing a possible bid. Lloyds has not commented.
RBC analyst Benjamin Toms argues Aldermore is a good fit. The lender focuses on buy-to-let and motor finance, and Lloyds is keen to build its capabilities in a buy-to-let market increasingly dominated by professional landlords.
The broker values Aldermore at £1.35 billion excluding its motor finance arm and £1.45 billion including it, using a model that compares peers' price to tangible book value against returns on equity, with a 40% takeover premium assumed.
RBC estimates the acquisition would lift Lloyds' earnings per share by 5.3% including motor finance, or 3.9% without, generating a return on investment of 35% or 31% respectively. The appeal, it said, is driven by significant cost and funding synergies, with Aldermore able to tap Lloyds' cheaper deposit base.
The analysis follows a Sky News report in July suggesting Aldermore could fetch £2 billion, a price at which the deal would still add 4.4% to earnings.
Against that backdrop, RBC said the valuations of London-listed specialist lenders including Close Brothers, OSB, Paragon, Shawbrook and Metro Bank look cheap.
The broker flagged two knock-on effects for those peers. A Lloyds purchase would remove one potential acquirer from the market, while pricing competition could intensify if Aldermore gained access to Lloyds' low-cost funding.
RBC rates Lloyds 'outperform' with a 124p price target, against a current share price of 109p. It said motor finance, long an overhang for the bank through the Financial Conduct Authority's review of the sector, is "no longer part of the story".
