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Santander Buys Alliance & Leicester For $2.6 Billion

Santander Buys Alliance & Leicester For $2.6 Billion July 14 (Bloomberg) -- Banco Santander SA, Spain's biggest bank, agreed to acquire Alliance & Leicester Plc for 1.26 billion pounds ($2.6 billion), less than half the U.K. mortgage lender's market value at the end of last year.

The Santander, Spain-based bank said today in a statement it will pay 317 pence a share, including a dividend, to Alliance & Leicester investors, plus inject 1 billion pounds into the company. Alliance & Leicester rose a record 53 percent in London trading, the most since it went public in 1997.

Santander Chairman Emilio Botin plans to combine Alliance & Leicester, hurt by the collapse of the U.S. subprime mortgage market and the worst U.K. housing slump in 15 years, with Abbey National, purchased for 9.2 billion pounds, in 2004. Botin has spent $60 billion on acquisitions from Brazil to Portugal since he took over in 1985.

``They've shown with Abbey that they can turn a business around in the U.K.,'' said Piers Hillier, the London-based head of European equities at WestLB Mellon Asset Management, who oversees 6 billion euros ($9.5 billion), including Santander shares. ``If they buy Alliance & Leicester at this price, it's a great deal for Santander.''

Alliance & Leicester jumped 115.75 pence to 335 pence in London, valuing the bank at 1.4 billion pounds and paring this year's decline to 48 percent. Credit Agricole SA, France's biggest bank, scrapped an offer two years ago to buy Alliance & Leicester when its market value was 5.2 billion pounds.

Better Deal

Botin said earlier this year the bank wouldn't bid for Alliance & Leicester after looking at its books in December. The price Santander is offering in the three-for-one stock swap is 46 percent below U.K. lender's price of 588 pence on Feb. 7, the day Botin said he wouldn't make an offer.

Shareholders have to decide between ``317 pence a share and an unknown future,'' Alliance & Leicster CEO David Bennett said on a conference call with reporters.

Santander rose 0.1 percent to 11.24 euros in Madrid, giving the bank a market value of 70.3 billion euros, the second-largest in Europe after London-based HSBC Holdings Plc.

``They are acquiring Alliance & Leicester on giveaway terms,'' David Cumming, head of U.K. equities at Standard Life Plc, said in a statement. ``I would be amazed if no one else counters with a higher offer,'' Cummings said. The Edinburgh-based insurer has a 2.35 percent stake in Alliance & Leicester.

`Very Quickly'

Santander approached Alliance & Leicester on July 11 and talks continued over the weekend before an agreement was reached, Antonio Horta Osorio, Abbey's head of banking, said on a conference call today. Alliance & Leicester has had no other offers, Bennett said. He declined to comment on whether the bank had held earlier talks with Santander or other potential bidders.

Abbey and Alliance & Leicester will have 959 branches and 7.6 percent of U.K. market when they are combined, Santander said.

``This deal gives us critical mass in the U.K.,'' Jose Antonio Alvarez, chief financial officer of Santander, said on a conference call. ``We're not oblivious to the possible risks that a deal of this kind in the British market could bring.''

House prices fell the most in 15 years in June as rising interest rates and reduced mortgage lending exacerbated the worst property slump since Britain's last recession in 1991, according to HBOS Plc, the U.K.'s biggest mortgage lender.

`Credit Watch'

Funding difficulties at Northern Rock Plc, Britain's third- biggest mortgage lender, triggered the first run on a British bank in more than a century. It was nationalized by the government in February after it couldn't find a buyer.

Alvarez said Santander can fund the Alliance & Leicester takeover without allowing core capital ratios to drop below its target of 6 percent. Santander plans to reduce British assets by as much as 30 billion pounds within the next two years.

The bank said it can cut costs by more than 180 million pounds in Britain by the end of 2011. About 400 million pounds of the new capital from Santander will be used to cover writedowns, said Alliance & Leicester Finance Chief Chris Rhodes. The rest is for possible further writedowns and reserves for bad loans.

Standard & Poor's left Santander and Abbey's credit ratings unchanged, and it put Alliance & Leicester's A/A-1 credit ratings on ``credit watch with positive implications.''

Under Santander's ownership, the U.K. bank ``will have greater strategic and financial flexibility,'' analysts at S&P said in a statement.

Santander focuses on consumer rather than investment banking and has reported no losses related directly to the collapse of the U.S. subprime market. Banks and securities firms have raised $324 billion in the past year after record writedowns and credit losses of almost $410 billion from the collapse of the subprime mortgage market, according to data compiled by Bloomberg.

`Deal Machine'

Santander acquired the Brazilian unit of Amsterdam-based ABN Amro Holding NV last year for 10.6 billion euros.

``Santander is a deal machine focused on costs savings,'' said Simon Maughan, a London-based analyst at MF Global Securities Ltd. who has a ``hold'' rating on Alliance & Leicester. ``It's been looking at increasing its returns in the U.K., which are lower than anywhere else in the world. Whenever it looks to increase returns, it does so by acquisition.''

Santander said first-quarter profit at the Abbey unit was 311 million euros, up 3.8 percent from a year earlier as it tripled its share of the U.K. mortgage market. Net mortgage lending was 2.9 billion pounds in the year's first three months.

Adding to Earnings

Alliance & Leicester, with more than 5.5 million customers and 254 branches, will produce a return on investment of about 19 percent by 2011, Santander said. The deal is scheduled to close in October and will add to earnings starting in 2009, Santander said. Its adviser was Merrill Lynch & Co.

Alliance & Leicester, which gets almost 60 percent of its funding from capital markets, abandoned its 2009 profit target in March amid higher funding costs and 391 million pounds in credit writedowns. It also took a funding charge of charge of 49 million pounds in the first four months of the year, it said in May.

The bank will probably post a first-half loss, said Derek Chambers, a London-based analyst at Standard & Poor's Equity Research Ltd., who has a ``hold'' rating on Alliance & Leicester.

``The pressure on margins and volumes makes the free-standing outlook unattractive,'' Chambers said. ``The portfolio might be more profitable if controlled by an owner with lower funding costs,'' Chambers said.

Alliance & Leicester's advisers were JPMorgan Cazenove Ltd., Morgan Stanley and NM Rothschild & Sons Ltd.

Santander's takeover probably won't trigger U.K. antitrust concerns, said Mark Phin, a London-based analyst at Keefe, Bruyette & Woods Ltd., who raised the bank's stock to ``market perform'' from ``underperform.'' Today's offer ``will likely provide some bedrock.''

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