Santander Mulls Sovereign Buy in Hunt for Bargains

Spain's Santander said it was in talks to acquire Sovereign Bancorp as the euro zone's largest bank hunted for bargains in a sector pummeled by the global financial crisis.

A source familiar with the matter said Santander was expected to pay $3.81 a share, or a total of $1.9 billion, for the stake in the U.S. bank it does not already hold. That matches Sovereign's closing price on Friday.

In a statement on Monday, Sovereign confirmed it was in "advanced discussions" with Santander.

In 2006, Santander paid $3.3 billion for 24.9 percent of Sovereign , becoming the largest shareholder of the U.S. bank.

"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.

Under an original agreement, Santander could not make a bid for the remaining stake it did not already own in Sovereign at market value until June 2009, though the rumoured price suggested Sovereign had brokered the takeover talks.

Risk Concerns

Like most U.S. banks, Sovereign has been hit by toxic debts emerging from the country's subprime crisis. In the second quarter it reported a 14 percent drop in net profit to $127.4 million.

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

The bank also hired Chief Executive Paul Perrault at the end of the month, signaling to some that it did not intend to sell itself in the near term.

In a research report, Sandler O'Neill & Partners analysts noted Perrault is unlikely to have come on board if the bank was looking for just a short-term CEO. The analysts suggested that either Santander was consulted on the hire or the deal has been discussed for some time and Perrault took the role on the understanding he will run Sovereign after its acquisition.

The analysts reiterated a "hold" rating on Sovereign stock, noting, "While SOV's fundamental prospects continue to deteriorate, we don't think the risk/reward tradeoff favors selling the stock at these levels."

Sovereign shares were down 19 cents, or 5 percent, at $3.62 in morning trading on the New York Stock Exchange. The shares are down 79 percent from their level a year ago.

For Santander, a buyout would raise 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.

Santander is also growing in Brazil after the acquisition of Banco Real last year.

Tiago Dionisio, a banking analyst at Espirito Santo, said, "A buyout of Sovereign means an even greater diversification for Santander ... and the delicate situation of the U.S. group could mean Santander has to make greater cash injections."

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."

Santander must also decide if the risk of acquiring the U.S. group is greater than that of allowing Sovereign, in which it has already invested enormous sums, to fail.

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.

Sovereign became the largest U.S. savings and loan last month when JPMorgan Chase bought the banking operations of Washington Mutual , then the largest thrift.

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