Sept. 18 (Bloomberg) -- Lloyds TSB Group Plc agreed to buy HBOS Plc for 12.2 billion pounds ($22.2 billion) after Britain's biggest mortgage lender lost half its market value in the past week and the government backed a deal.

Lloyds TSB, the U.K.'s biggest provider of checking accounts, fell 3.5 percent today in London trading after saying it will pay 232 pence a share in stock for HBOS, 58 percent more than yesterday's closing price of 147.1. The combined bank will sell ``non-core'' assets, pay a second-half dividend in stock and reduce the payout ratio in 2009 to 40 percent of earnings, officials told reporters.

Edinburgh-based HBOS lost almost half its market value this week on concerns about a shortage of funds to back its mortgages, leaving the company in the same predicament that led to the government-backed bailout of Northern Rock a year ago. Prime Minister Gordon Brown discussed the fate of HBOS with Lloyds TSB Chairman Victor Blank as recently as four days ago, according to a person familiar with the meeting.

``They are buying a bank at significantly below its tangible book value,'' said Simon Maughan, a London-based analyst at MF Global Securities Ltd. ``In the coming weeks it will prove to be a highly attractive deal.''

HBOS, which gets about half its funding from capital markets, has been under pressure since Lehman Brothers Holdings Inc. filed the biggest bankruptcy in history on Sept. 15 and New York-based insurer American International Group Inc. needed an $85 billion loan from the U.S. government to avoid failing.

`Intervention Notice'

Lloyds TSB fell 9.75 pence to 270 pence at 8:11 a.m. in London trading, valuing the company at 15.3 billion pounds. HBOS shares surged 30 percent to 190.5 pence, giving the company a market of 10.1 billion pounds.

The government will ``issue an intervention notice in the proposed merger of HBOS and Lloyds TSB on public interest grounds to ensure the stability of the U.K. financial system,'' it said in a separate statement.

Together, Lloyds TSB and HBOS will have a 28 percent share of Britain's mortgage market and a consumer banking network with more than 3,300 branches. Both companies earn more than 70 percent of their revenue from the U.K.

Lloyds TSB Chief Executive Officer Eric Daniels will be head of the enlarged company, and the bank's Victor Blank will be chairman. The combined company will add 1 billion pounds in pretax earnings by 2011, the company said.

`Shotgun Marriage'

``There should be no impression that this is a shotgun marriage,'' Daniels told reporters today. ``Very clearly we are concerned about funding and liquidity. Who wouldn't be. We'll be managing our balance sheet and liquidity with extreme care.''

The combined bank will be based in London and will cut an unspecified number of jobs as the company integrates administrative services and sells assets.

``This is the right transaction for HBOS and its shareholders,'' HBOS Chairman Dennis Stevenson said in the statement. ``Against the backdrop of the very high levels of volatility our industry is experiencing, the combined group will be one of the strongest players.''

Leading institutional shareholders in HBOS have threatened to oppose Lloyds TSB's bid for the lender, the Daily Telegraph reported today, without saying where it got the information. Richard Buxton, head of U.K. equities at Schroders Plc, said he was ``completely bemused why HBOS is entertaining this prospect,'' according to the Telegraph.

Back to 1695

HBOS, which employs about 72,000 people in the U.K., was created in 2001 in the 9.7 billion-pound merger of Yorkshire-based mortgage lender Halifax Plc and Edinburgh-based Bank of Scotland, whose roots date back to 1695. Lloyds TSB employs about 58,000.

Daniels said in July the bank will consider acquiring weakened lenders. It weighed a bid for Northern Rock 12 months ago, before the lender needed emergency funding from the Bank of England following the first run on a British bank in more than a century.

``The last thing they want is a Northern Rock re-run,'' said Julian Chillingworth, chief investment officer at Rathbone Brothers Plc, which owns shares of HBOS and Lloyds TSB, before the deal was announced.

``It is sad to see HBOS lose its independence in this way, but we needed a good market-driven solution,'' said Richard Lambert, director-general of the London-based Confederation of British Industry. ``Lloyds TSB is a strong, well-capitalized institution, and the new entity will be well placed to withstand the current turbulence.''

HBOS raised 4 billion pounds two months ago in a share sale to shore up capital depleted by asset writedowns and the worst U.K. housing market since the early 1990s.

To contact the reporters on this story: Jon Menon in London at jmenon1@bloomberg.net; Ben Livesey in London at blivesey@bloomberg.net

Last Updated: September 18, 2008 03:20 EDT