Sept. 18 (Bloomberg) -- Lloyds TSB Group Plc, the bank that considered buying Northern Rock Plc, will acquire HBOS Plc for about 12 billion pounds ($22 billion) to create a lender that controls more than a quarter of the U.K. mortgage market, two people with knowledge of the decision said.

Lloyds TSB will pay about 232 pence a share in stock for HBOS, 58 percent more than its closing price in London trading, said the people, who declined to be identified before an official announcement. Edinburgh-based HBOS, the U.K.'s largest provider of home loans, fell 19 percent yesterday to 147.1 pence.

HBOS, which lost almost half its market value this week, has been hurt by 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. Prime Minister Gordon Brown discussed the fate of HBOS with Lloyds TSB Chairman Victor Blank as recently as four days ago, according to a person familiar with the meeting.

``The last thing they want is a Northern Rock re-run,'' said Julian Chillingworth, chief investment officer at Rathbone Brothers Plc, which owns shares of HBOS and Lloyds TSB.

Officials at the two companies declined to comment.

The government will seek to waive the U.K.'s antitrust restrictions to permit Lloyds TSB's takeover of HBOS, said a person familiar with the matter. The two banks combined have a 28 percent share of Britain's mortgage market and a consumer banking network with more than 3,300 branches. Both companies earn more than 70 percent of their revenue from the U.K.

Leading Shareholders

Leading institutional shareholders in HBOS have threatened to oppose Lloyds TSB's bid for the lender, the Daily Telegraph reported today, without saying where it got the information.

Richard Buxton, head of U.K. equities at Schroders Plc, said he was ``completely bemused why HBOS is entertaining this prospect,'' according to the Telegraph.

Lloyds TSB Chief Executive Officer Eric Daniels, 57, probably will run the combined group, making the future for HBOS CEO Andy Hornby unclear, according to the British Broadcasting Corp., which was first to report the takeover talks.

HBOS, which employs about 72,000 people in the U.K., was created in 2001 in the 9.7 billion-pound merger of Yorkshire- based mortgage lender Halifax Plc and Edinburgh-based Bank of Scotland, whose roots date back to 1695. Lloyds TSB employs about 58,000.

Weakened Lenders

Daniels said in July the bank will consider acquiring weakened lenders. The bank weighed a bid for Northern Rock before the lender needed emergency funding from the Bank of England last September following the first run on a British bank in more than a century.

HBOS, which gets about half its funding from capital markets, has been under pressure since Lehman Brothers Holdings Inc. filed the biggest bankruptcy in history on Sept. 15 and New York-based insurer American International Group Inc. needed an $85 billion loan from the U.S. government to avoid failing.

``It is sad to see HBOS lose its independence in this way, but we needed a good market-driven solution,'' said Richard Lambert, director-general of the London-based Confederation of British Industry. ``Lloyds TSB is a strong, well-capitalized institution, and the new entity will be well placed to withstand the current turbulence.''

HBOS raised 4 billion pounds two months ago in a share sale to shore up capital depleted by asset writedowns and the worst U.K. housing market since the early 1990s.

The Prime Minister's office said today it was ready to intervene in the banking market to avoid another collapse. HBOS ``continues to fund its business in a satisfactory way,'' the U.K. banking regulator, the Financial Services Authority, said in a statement.

Ged Nichols, general secretary of HBOS trade union Accord, said he is seeking ``immediate'' talks with HBOS to ``assess the implications for our members' jobs and pensions.''

(Editor: Irene Lu)