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Santander takes over Sovereign

Latest update : 2008-10-14

The eurozone's largest banking group, Banco Santander, continues its buying spree. After taking over British banks Bradford & Bingley and Alliance & Leicester, it has announced the acquisition of US Sovereign Bancorp for 1.9 billion dollars.

Spain's Santander bank said it will acquire the remaining stake of Sovereign Bancorp Inc it does not own for $1.9 billion in stock, as the euro zone's largest bank hunted for bargains in a sector pummeled by the global financial crisis.

Santander's deal, which will gain it a strong foothold in the United States, came as financial institutions rush to merge and governments around the world worked to rescue the ailing financial sector.

Santander said it would pay $3.81 a share for the 75.65 percent stake in the U.S. bank it does not already hold. The transaction, which swaps 0.2924 shares of Santander American Depositary Share for each share of Sovereign, was expected to close in the first quarter of 2009.

Sovereign, whose share price has declined 78.5 percent in the last year to $3.68 on Monday, became the largest U.S. savings and loan last month when JP Morgan Chase & Co bought the banking operations of Washington Mutual Inc, then the largest thrift.

"Given the unprecedented uncertainty in the current market environment and the challenges facing Sovereign, we believe this is the right transaction at the right time for Sovereign," Ralph Whitworth, chairman of the capital and finance committee of Sovereign's board, said in a statement.

"This is a very attractive price and ... is strategically positive because it will allow Santander to strengthen its position in the United States and apply its business model to a company it knows," Spanish brokerage Renta 4 said in a note to investors before the deal was finalized.

Sovereign also announced a preliminary third quarter net loss of $982 million, or $1.48 per share, including a $575 million impairment charge on its Fannie Mae and Freddie Mac stock and a loss of $602 million related to the sale of its entire portfolio of collateralized debt obligations.

The S&L said it faced intense deposit competition and concerns about "general safety and soundness" early in the quarter, following the failure of California-based IndyMac, but noted that October deposit trends have stabilized.

Sovereign's period end deposit balances have declined $4.2 billion or 8.8 percent from June 30, primarily in money market and government accounts.

Sovereign said it has increased its allowance for credit losses to $1 billion, up $175 million from June 30, primarily due to deterioration in its commercial loan portfolio and to reflect higher risk in a deteriorating economic environment.

Its allowance for credit losses to total loans at Sept. 30 was 1.79 percent, up from 1.47 percent at June 30, and 1.14 percent at Sept. 30, 2007.


Enhancing geographic footprint


In 2006, Santander paid $3.3 billion for 24.9 percent of Sovereign, becoming its largest shareholder.

Under that agreement, Santander could not bid for the remaining stake in Sovereign at market value until June 2009.

But like most U.S. banks, Sovereign has been hit by toxic debts emerging from the country's subprime crisis.

To shore up capital, Sovereign raised $1.9 billion in May and had eliminated its dividend for this year.

A committee of independent directors on Sovereign's capital and finance committee requested that Santander consider
purchasing the part of the company it does not already own. The committee recommended the deal to its board of directors.

Santander said it will significantly enhance its geographic footprint and result in a net profit for Sovereign of $750 million in 2011.

The transaction needs bank regulatory approvals in the United States and Spain and approval by both companies' shareholders.

Banco Santander will call an extraordinary general meeting of the bank's shareholders to approve a capital increase and issuance of about 147 million new shares, or about 2 percent of Banco Santander's capital.

Barclays Capital served as lead financial adviser to Sovereign Bancorp in the transaction.


Aggressive buying


For Santander, a buyout raises concerns over the Spanish group's aggressive acquisition policy, which this year has sucked up British bank Bradford & Bingley's deposits and branch network and Alliance & Leicester Plc.

Santander also said on Monday it had injected $1.7 billion into its British bank Abbey, as part of a government-led requirement for all UK banks to hold a bigger capital cushion.

This came in addition to its participation last year in the break up of ABN AMRO, which included the rapid sale of the Italian bank Antonveneta it secured under the ABN deal, which it then sold to another Italian bank.

The Spanish bank is also growing in Brazil after the acquisition of Banco Real last year.

The U.S. government's $700 billion bailout package for the country's struggling financial institutions could mean that Santander's executives believe the worst of the dangers facing Sovereign have passed.

Caja Madrid analyst Javier Bernat said, "There's always a risk to an acquisition such as this, but thanks to a clean-out in the United States, it's less than it might have been."

"Santander has been studying this operation and has been looking through Sovereign's books for a long time. This is an opportunity, especially considering the price."

The Spanish bank wrote off 737 million euros ($1.01 billion) on its investment in February and at current prices is facing latent capital losses of 2 billion euros.

Date created : 2008-10-14