MILLIONS of building-society members who received handsome demutualisation windfalls in the 1990s are nursing hefty losses, with some having seen their holdings wiped out.

More than 100,000 Northern Rock shareholders saw the value of their holdings crash to nothing when the bank was nationalised in February, adding about £100 billion to the national debt.

Its shares had surged almost fourfold from 463p at demutualisation in October 1997 to a high of 1,251p in February last year.

B&B shares – held by more than 1m people and now likely to be virtually worthless after the government acquired its £41 billion loan book a week ago – floated at 244p on December 4, 2000, and rose to a high of 482Äp in October 2006.

We look at the prospects.

B&B and Northern Rock

An independent auditor is valuing each business, but it will be some time before either group discovers what – if anything – they will receive.

Roger Lawson at the UK Shareholders Association, representing small investors, said: “The government is concerned only about depositors, the stability of the financial sector and perhaps employees, but shareholders are just totally ignored. In many cases, their life savings have been lost.

“Bradford & Bingley shareholders are outraged that the company seemed to be solvent and they were invited to subscribe to a rights issue, and then suddenly it was nationalised without consultation and the shares confiscated.”

The association wants to know how B&B’s financial position could have deteriorated so rapidly since its £400m rights issue two months ago – the third rights issue the bank had undertaken this year.

It has called upon the regulator, the Financial Services Authority (FSA), to investigate.

The association is also suing the government for compensation for former Northern Rock shareholders.

That tactic proved unsuccessful when Railtrack shareholders sued for £157m in 2005 after the government placed the company in administration. The High Court decision left the 48,000 shareholders footing the government’s legal costs of just over £2m.

Joshua Raymond at City Index said: “There could be room for manoeuvre for shareholders to receive some form of payment for their shares after Northern Rock and Bradford & Bingley are sold by the government, but this could take a considerable amount of time.”

Halifax

Halifax – part of banking giant HBOS, subject of a rescue takeover by Lloyds TSB – became a bank in June 1997, giving shares to more than 7.6m customers. The average windfall was 333 shares worth £2,441.

By February last year, the share price was at 1,167p – so 333 shares would have been worth £3,886. Now those shares a r e worth just £666 – a near-73% drop in capital terms. Shareholders who reinvested dividends have seen a lesser 67% fall in value.

LLoyds TSB has said that HBOS shareholders will receive 0.83 of a Lloyds share for every HBOS share they own. That values the company at around 20% more than its current share price. Lloyds TSB shares closed the week at 290Äp, and HBOS at 200½p. So, 83% of a Lloyds share is worth 240.9p – 44.4p or 20.1% more than an HBOS share. Analysts expect LLoyds to revise the terms of the deal downwards, perhaps to as low as 0.6 of a Lloyds share for every HBOS share. That would give HBOS shareholders the equivalent of 174.2p per share, based on current prices.

Large institutional shareholders, however, are still likely to vote for the deal to secure the future of HBOS – taking the decision largely out of retail shareholders’ hands.

Anthony Bolton at fund manager Fidelity supports the merger. “It’ll be in the interests of shareholders in both groups over the longer term,” he said.

Alliance & Leicester

Alliance & Leicester (A&L) shareholders have not fared much better. Its shares were worth 566½p on demutualisation in April 1997. Now they are worth 46% less in capital terms. Investors have still lost 7.2% with dividends reinvested.

On Friday, it will be acquired by Banco Santander, the Spanish bank that already owns Abbey and is buying B&B’s savings business and branches.

Then, A&L’s 500,000-plus shareholders will receive one Santander share for every three A&L shares. This is a good deal based on Friday’s close: A&L shares were at 304p and Santander at €15.65 (£12.19).

Under Spanish law, dividends will be taxed at 18%. British basic-rate taxpayers can apply for a 3% refund through a Spanish tax representative or “gestoria”. They would pay 15%, compared with the 10% they usually pay. Higher-rate taxpayers are charged 32.5% on dividends and would have to pay the difference of 14.5% to HM Revenue & Customs.

“The allure of joining the share register of what may be seen one of Europe’s up-and-coming financial institutions may be strong, but some will not want to inherit the awkward tax situation that comes with owning part of a Spanish-registered business,” said Hugo Shaw at the broker Bestinvest.

Woolwich

Investors in Woolwich, which became a bank in July 1997 and was taken over by Barclays in 2000 – have fared better. Their shares have risen by 19.5%.

With dividends reinvested, shareholders have made 86.1%, but the share price has still more than halved to 368p from a high of 790p in February 2007.

What now?

Despite the turmoil, investors are still buying into financials, broker TD Waterhouse said.

“Although the demise of B&B is a sad end to over 150 years of financial heritage, it has not dissuaded customers from continuing to seek opportunities across UK and international markets,” said Angus Rig-by, the broker’s chief executive.

Its top 10 retail buys of the past week include Lloyds TSB, Royal Bank of Scotland, HBOS and Barclays.

A&L, however, has been subject to more selling than buying – 91% to 9% in the past week, The Share Centre said.

Shaw suggests the Jupiter Financial Opportunities fund for those who want to sell A&L and reinvest in the sector. Gavin Oldham at The Share Centre likes HSBC and Barclays.

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