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BLBG: Commonwealth in Talks to Acquire HBOS Australian Unit (Update2)
By Robert Fenner and Finbarr Flynn

Oct. 7 (Bloomberg) -- Commonwealth Bank of Australia, the nation's biggest provider of mortgages, is in ``exclusive'' talks with HBOS Plc to acquire its BankWest unit to expand in Western Australia, the country's fastest-growing state.

Talks are continuing and the companies haven't reached an agreement, Sydney-based Commonwealth said in statement today. The bank may pay A$2 billion ($1.4 billion) for BankWest, the Australian Financial Review reported today, without saying where it got the information.

Acquiring BankWest would help Commonwealth Chief Executive Officer Ralph Norris fend off a threat to its dominance in Australian mortgage lending from Westpac Banking Corp., which is poised to move into first place with a takeover of St. George Bank Ltd. Norris is taking advantage of Edinburgh-based HBOS's troubles in its home market, where the government stepped in to ensure Lloyds TSB Group Plc's purchase of the Scottish bank after it lost more than half its value in a week on funding concerns.

``They're definitely looking to gain exposure to what's seen as the biggest growth state in Australia, and quite a gripping brand,'' Tim Morris, an equities analyst at Sydney-based Wise- Owl.com, said in a Bloomberg Television interview today. ``Unlike America and some parts of Europe, the opportunities for M&A in Australia are more limited because the market is more concentrated.''

BankWest had about A$36.7 billion of deposits as of Sept. 5. The company has about 120 branches in Western Australia, a state that produces a third of the world's traded iron ore and 75 percent of the nation's gold, and plans to open 160 more across the country, according to HBOS's Web site.

HBOS Plummets

Commonwealth Bank fell 0.1 percent to A$43.96 as of 1:35 p.m. in Sydney trading, while the benchmark S&P/ASX200 Index declined 0.8 percent.

HBOS plunged 61 percent in London trading last month 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. HBOS raised 4 billion pounds ($7 billion) in July in a share sale to shore up capital depleted by asset writedowns and the worst U.K. housing market since the early 1990s.

Lloyds agreed Sept. 17 to buy HBOS in a stock swap, in an acquisition valued at 12.2 billion pounds at the time. HBOS shareholders will receive 0.83 Lloyds TSB shares for every HBOS share they own. The companies have said they aim to complete the deal, backed by the U.K. government, by early next year.

Four Pillars

Australia's banking industry is dominated by its largest lenders -- National Australia Bank, Commonwealth, Westpac and Australia & New Zealand Banking Group -- who are barred from merging with each other under the government's so-called Four Pillars policy.

St. George, Australia's fifth-biggest bank, agreed to be bought by Westpac last month after an independent expert recommended the A$17.4 billion offer to create the nation's biggest mortgage lender.

HBOS Australia, which has more than 6,000 employees at units including BankWest, Capital Finance Australia Ltd. and St. Andrew's Australia, posted a 15 percent increase in pretax profit to A$757 million in 2007. Fee and commission income rose 36 percent while net interest income climbed 24 percent.

To contact the reporters on this story: Robert Fenner in Melbourne rfenner@bloomberg.net; Finbarr Flynn in Tokyo at fflynn3@bloomberg.net