FRANCE – Credit Agricole’s 19.5 billion euro bid for Credit Lyonnais would create an entity with a combined 5.6 billion euros in European pension assets under management – though a source close to the deal says a merger won’t be easy because of the banks' different cultures.

Agricole currently has a 17.4% stake in Lyonnais, compared to BNP Paribas’ 16.2% stake, but plans to acquire the combined 21.2% holdings of AGF, Commerzbank, BBVA and IntesaBci. The move is widely seen as being spurred by competitor BNP Paribas’ taking an increased stake in Lyonnais two weeks ago.

In a statement released by CMF, the French market regulator, Credit Agricole says it plans to offer five of its own shares plus 148.24 euros for every four Lyonnais shares held – the equivalent of 56 euros per Lyonnais share. The offer values Lyonnais at 19.5 billion euros. The bid was approved by Credit Lyonnais and Agricole on Sunday night.

Says a person familiar with the situation who declined to be named: “Credit Agricole has had its sights set on Lyonnais for a while, and would never have been under the illusion that it would be able to buy it cheaply.

“It won’t be an easy for the two companies to merge. Agricole is highly decentralised, while Lyonnais is highly centralised. But both are very French, and will be able to take advantage of cost synergies.”

Agricole, although it has been considering a merger with Lyonnais for several months, had been seen as dragging its feet on finalising a deal. BNP Paribas’ acquisition of the 10.9% government’s stake two weeks ago seems to have acted as a wake up call. The French agricultural bank promptly changed its chairman, appointing the combative Rene Carron. And it raised its stake to 17.4% with purchases on the open market.

“There is no doubt that a change of chairman made the difference in political attitude in the corporation to making a bid for Lyonnais,” comments the source.

Credit Agricole manages 3.8 billion euros in European pension assets while Credit Lyonnais Asset Management controls 1.8 billion euros in European pension assets. Agricole did not say how it saw the future shape of the merged entity’s asset management business. The combined assets under management would put the merged bank at around 65th largest manager of European pension fund assets.

For its part BNP Paribas controls 4.5 billion euros in European pension assets.

Agricole’s announcement prompted Standard & Poor’s and Moody’s to put Agricole on watch for a possible downgrade.

Says S&P Research: “While the Credit Agricole group's capitalisation has historically been satisfactory by international standards, the combined group would initially be characterized by a weaker capital position, due to the significant cash outlay involved in the transaction.”

Credit Lyonnais, on the other hand, is on watch for a possible upgrade.

Moody’s was positive about a merger: “The combination of Credit Agricole and Credit Lyonnais would create a group with dominant market shares in French retail banking. The combined group would also achieve enhanced competitive positions in other major business segments, notably in retail financial services, asset management and insurance.”

From an employee perspective, Agricole seems more popular a partner than BNP Paribas. Comments the source: “Agricole and Lyonnais are union shops, and the unions are behind a takeover by Credit Agricole.”

Whether BNP Paribas will make a counter offer looks unlikely, and would be a very aggressive move, analysts suggest. Alternative offers for Lyonnais are invited between January 16 and February 12 2003.

If no alternative offers are accepted, the merged Lyonnais and Agricole would take over from BNP Paribas as the largest bank in the euro currency zone (based on a 56 euro share price).