updated 6/13/2007 9:37:30 AM ET 2007-06-13T13:37:30

Barclays has drawn up contingency plans to restructure its all-share offer for ABN Amro with a significant cash sweetener, in case it is forced into a full-blown battle for control of the Dutch lender.

The British bank recognizes that, unless legal disputes run in its favour, it will need to improve its $86 billionoffer if it is to trump the Royal Bank of Scotland-led consortium. But it is mindful of warnings from shareholders not to raise its price.

It is therefore looking at reducing the number of shares it would issue for ABN Amro and replacing them with cash, people familiar with the matter have said.

Barclays is not expected to make a decision about restructuring its offer until it becomes clear whether the RBS-led consortium can press ahead with its rival 71.4 billion pounds break-up bid for ABN Amro. That offer depends on the group – which includes Santander of Spain and Fortis, the Belgo-Dutch group – resolving its dispute with Bank of America over the ownership of LaSalle, ABN Amro's U.S. unit.

The prospect of Barclays sweetening its bid will alarm big UK investors who are concerned about a bidding war between Barclays and RBS. Shareholders with big holdings in both banks are concerned that a battle would damage both institutions.

Barclays' shares fell as low as 725.8 pence in morning trading on fears a bidding war for teh Dutch bank could ensue. RBS shares were also down 6p or nearly 1 per cent at 636 pence on another negative day for the markets. However, ABN Amro shares were one of the few risers on the AEX in Amsterdam on hopes the rival bidders would raise their offers. By mid-morning ABN shares were up 0.09 percent at 35.13 pounds compared to a 0.45 percent fall for the broader market.

Barclays believes it could improve its offer without relaxing its strict criteria for acquisitions. People familiar with the matter said Barclays could raise some cash by raiding the reserves it is required to hold, reducing the combined group's capital ratio from 5.75 percent to around 5 percent, while scaling back the number of shares it issues to ABN Amro shareholders. If the consortium bid were to succeed, RBS's capital ratio would fall below 5 percent.

Another option is for Barclays to use the cash ABN Amro is expected to receive from the sale of LaSalle. Barclays and ABN Amro had agreed to return 12 billion pounds to shareholders of the combined bank through a share buyback. Barclays could pay some or all of this cash to ABN shareholders by including it in the offer.

The introduction of cash would appeal to the hedge funds that hold a big proportion of ABN Amro's shares. The consortium's proposed offer, worth about 38.50 pounds per ABN Amro share, includes more than 30 pounds a share in cash. But the consortium has set aside 1 pound per share to cover legal claims from BofA and ABN Amro's share price, 35.10 pounds at the close, reflects uncertainty that the break-up bid will succeed.

Copyright The Financial Times Ltd. All rights reserved.


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