Horne: The Gloves are Off in British Banking Sector
DEBORAH MARCHINI, CNN ANCHOR: A new player may be emerging in an unfolding British takeover battle: Retail banker Lloyds, as Todd was telling us earlier, reportedly is considering a hostile bid for the Royal Bank of Scotland.</s>JOHN DEFTERIOS, CNN ANCHOR: It's a pretty hostile play all across the board, in fact, in the U.K. From London, let's welcome Paul Horne. He joins us for a closer look at the players. He's the European equity strategist with Salomon Smith Barney there. And Paul, let's start in banking because, like the rest of Europe, many say this is an area ripe for consolidation, but financial services not doing too well with interest rates moving higher. What's your call?</s>PAUL HORNE, SALOMON SMITH BARNEY: Indeed, good morning. Well, seen from an economist point of view, not a strategist point of view, it looks like a -- quite a complicated situation with Lloyds TSB bidding for the Royal Bank of Scotland, with in turn is bidding for National Westminster against other competing bids, very complicated. But it bears out what we've saying about financial services and banking in particular, this is a sector which is restructuring drastically, and this will continue with major cost- savings potential as we go through these different mergers.</s>MARCHINI: This is not the only sector that seems to be restructuring radically. In fact, the gentlemen's gloves are off when it comes to takeover battles, most notably with Vodafone AirTouch. Are we witnessing a complete rewriting of the rules of business for Europe?</s>HORNE: Well, that's right. Certainly in British banking, the gloves have been off for quite some time, and they continue to be. But in seeing Germany allow a hostile bid for Mannesmann, for instance, by Vodafone to succeed, that's really remarkable. And then we get the change in German tax law, which should open up the German corporate structure very substantially when they eliminate the capital gains on sale of German shares held by German companies. So Europe, continental Europe, really is starting to move in the restructuring sense.</s>MARCHINI: If Europe is for sale, does that include to, say, American bidders?</s>HORNE: Absolutely. American bidders have been very active over here. We will see much more of that, and it will particularly interesting if we see an American financial services group or bank, for instance, bidding for a German or French or Italian bank; that will be the big breakthrough.</s>DEFTERIOS: Deb and I were commenting amongst ourselves today, if you look at the indices this morning, again it is Paris which is standing out, and they've got a great restructure in play led there by corporate France, not by the government. Would you say, as a U.S. investor, that one should focus on some of the ADRs in France, because it is such a solid economy right now, Paul?</s>HORNE: Well, certainly, among the big European economies, France has got the fastest growth rate, likely to continue having the fastest growth rate this year and next year. Also, the government has been very acquiescent to the private-sector moves, both by French companies abroad, but also by foreign companies, German and Italian companies buying into the French corporate sector. France does look good from this point of view.</s>MARCHINI: The Bank of England meets on Thursday. The dollar has been strengthening pretty much across the board, absent today, where we see the pound a little stronger, but it's still under a $1.60. Do you think the Bank of England will raise interest rates?</s>HORNE: Yes, we do. Not really so much for sterling, which has been weakened a bit because of the Vodafone management arrangement going forward over the next couple of weeks, but primarily because the economy shows all signs of overheating. Housing prices, for instance, on a January-January basis were up 16 percent, very close to double what the Bank of England had been counting on in its own economic forecast for this year. So the bank has got to cool down both the housing sector and the consumption sector before we start seeing some signs of inflation.</s>DEFTERIOS: One final thought: I was looking at this -- a piece on the Spanish market, where Telefonica now makes up 35 percent of an index. We know how dominant Vodafone is. It's an interesting play. Is it too late for an American investor to play telecoms in Europe because of the consolidation we've seen in the last year in your view?</s>HORNE: Well, telecoms certainly is one of our preferred sectors in terms of the European investment area, primarily because of the restructuring, but also because you are seeing some of the higher value-added components of these big telecom groups being spun off and becoming very attractive in their own right. T-Online, for instance, from Deutsche Telekom, is one of those that will be spun off. Terra Networks, for instance, with Telefonica, both outstanding plays, and there will be many more these as we move forward this year.</s>MARCHINI: All right. I'm sorry to say, we are out of time. Paul Horne of Salomon Smith Barney, equity analyst, thank you so much for joining us live from London this morning.</s>HORNE: Thank you very much.</s>DEFTERIOS: Nice to see you again.