UPDATE: Co-Operative Buys Lloyds Branches, Leapfrogs into Big League

--Co-Operative tranforms into major bank player through deal

--Lloyds Sells 632 branches for up to GBP800M, including earn-outs

(Rewrites, adds detail, Co-Operative CEO comment.)

 
   By Max Colchester and Jessica Hodgson 
 

LONDON--The Co-Operative Group (CPBB.LN) said Thursday it will acquire 632 retail bank branches from Lloyds Banking Group PLC (LYG), sealing a long-awaited deal that will transform the funerals-to-food group into the U.K.'s sixth-largest retail banking business.

The Co-Op agreed to pay initial consideration of GBP350 million for the branches, and up to an additional GBP400 million in present value--equivalent to around GBP800 million in total subject to the performance of the Co-Operative groups combined banking businesses over a 15-year period.

The figure is significantly below the estimated GBP1.5 billion that was reportedly offered when discussions began a year ago, reflecting the decline in the value of bank assets over the period.

The Co-Operative, at a stroke, acquires 4.8 million customer accounts through the purchase. Combining this with its existing branch network will give it around 1,000 U.K. bank branches and roughly 7% of all U.K. current accounts, up from its previous share of roughly 2% the Co-Operative said.

The Co-Operative's Group Chief Executive Peter Marks told reporters the acquisition would help deliver "the most significant development in high street banking in a generation," and offer U.K. consumers an alternative to an industry whose image he said had been "badly tarnished," during the financial crisis and by recent events.

Lloyds, which is roughly 40%-owned by the U.K. government, has had to sell the branches on condition of receiving state aid when it was bailed out in 2008. But the sale, code-named Verde, has been dogged by regulatory issues related to the experience of the Co-Op's board and the amount of capital the group would have to hold if it boosted its banking business.

The sale of the branches is heralded by the British government as a way to boost competition in the U.K. banking sector. "This is another step towards creating a new banking system for Britain that gives real choice to customers and supports the economy," George Osborne, the U.K. Chancellor, said in a statement Thursday.

The U.K.'s Independent Commission on Banking said a standalone bank needs to achieve 6% market share in order to be competitive.

"We believe the Co-Operative will be a good owner for our business, customers and colleagues, and the combined banking business will be a significant competitor on the high street with nearly 10% of today's U.K. branch network," Antonio Horta-Osorio, Lloyds' CEO, said in a statement.

Paul Pester, currently CEO of Verde, will become CEO of the combined Co-Op banking business, subject to FSA approval, the Co-Operative said in a statement.

The Lloyds statement said Lloyds was expected to inject the branches with GBP1.5 billion of equity capital. The branches will have approximately GBP11 billion of risk-weighted assets on a standardised basis.

Mr. Marks said on the conference call that he expected the deal to close, subject to regulatory approval, roughly in mid 2013.

-Write to Max Colchester at max.colchester@wsj.com

(Ainsley Thomson in London contributed to this article.)

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