Bloomberg News LONDON - Barclays PLC, Britain's third-largest bank, said it is in talks to buy Woolwich PLC to increase its share of the home loan market and that it may make a bid valuing the mortgage lender at $8.3 billion.
Such a bid would be 34% more than Woolwich's market value based on Tuesday's closing share price.
Investors said Woolwich is worth the premium.
"Of the mortgage banks, Woolwich has been the most highly regarded with the way they have proceeded with their Internet and telephone bank strategy," said Ashley Willing, a fund manager at Gartmore PLC.
Buying Woolwich would more than satisfy Barclays' aim to double its share of the U.K. mortgage market. It also would deliver the mortgage bank with the highest percentage of online customers.
Barclays, under chief executive Matthew Barrett, faces pressure to cut costs and expand as accelerating competition for customers narrows profit margins.
"This is a neat package for Barclays to acquire," said Tim Rees, director of U.K. equities at Clerical Medical Investment Group, which manages about $42.5 billion, including both Woolwich and Barclays. "Woolwich is deemed to have one of the best e-commerce strategies."
Woolwich shares rose 27%. Barclays would be getting the lender when its shares are trading near their lowest level since Woolwich converted to a publicly traded company in 1997. A formal offer may come as early as today, people close to the banks said.
U.K. banks are under pressure to consolidate as companies sell products more cheaply over the Internet, making it harder to earn profit from traditional banking. Royal Bank of Scotland Group PLC this year outbid Bank of Scotland for National Westminster Bank. HSBC Holdings PLC said in April it was buying Credit Commercial de France for $10 billion.
Woolwich's chief executive probably would take on a senior role in the retail-services division of post-merger Barclays, analysts said. He may run Barclays' newly created mortgage unit, some suggested.
Other mortgage lenders' shares rose amid speculation that a bid from Barclays would pave the way for other banks to buy former building societies.
"Every single bank that is mouth-sized, that is seen as vulnerable, will now be the subject of a lot of speculation," said James Dewhurst, a director at Charterhouse Tilney Securities Ltd. "What the move from Barclays has done is put a sense of urgency into the process now."