And for his next trick… Botín weaves his magic at Santander

IT MIGHT BE one of Emilio Botín’s smallest deals, but Santander’s agreed bid for UK bank Alliance & Leicester seals his reputation as one of the greatest bank dealmakers of his generation.

While HBOS, the largest mortgage lender in the UK, was waiting for the results of a disastrous rights issue, Santander’s Abbey had quickly bought 2.5% of the UK banking market for a little over £1 billion ($2 billion).

The speed with which the deal was concluded took everybody by surprise. Less than 24 hours after picking up a trophy for being the best bank in the UK at Euromoney’s Awards for Excellence dinner in London on July 10, Abbey’s chief executive, António Horta Osório, was ready to make his move for A&L.

At 4.35pm on Friday afternoon, just after the UK markets had closed for the weekend, Horta Osório made a call to A&L’s chief executive, David Bennett. Rumours about A&L’s difficulties had been rife but overstated. The lender had funding in place for the next 18 months but, like HBOS, it would need to raise capital and also shrink its business to the point where its growth opportunities were severely restricted.

Bennett opened his books for the second time in eight months to Santander/Abbey. The due diligence process ran from Friday night through to Sunday morning. At lunchtime on Sunday, Santander called a board meeting to discuss and then make the offer. By 2am on Monday, Bennett and his board had approved it.

A deal worth a little over $2 billion might not seem of huge importance to a bank that is now the seventh largest in the world by market capitalization (see table right).

But during the course of this decade, Botín and the Santander group that he chairs have entered new territory for the banking industry: an attempt to build a global retail and commercial bank that is worth more than the sum of its parts.

As chief executive Alfredo Sáenz said in his letter to shareholders this year: "We know that leveraging our global scope and creating market value is not just an option. It is an obligation. The market will demand a break-up of any bank that is not able to create value as a group, thus being only a collection of businesses."

The business now stretches across Latin America, including Brazil, where Santander’s operations make it the only international bank to have a 10%-plus market share in one of the Bric (Brazil, Russia, India, China) economies. Its European business not only includes Spain and the UK but also a thriving consumer finance business in western Europe and parts of central Europe.

And the numbers, by Sáenz’s benchmark, appear to add up: although Santander is only the 10th-biggest bank by assets in Europe, it is the second most valuable by market capitalization, behind only HSBC Holdings.

Perhaps the most telling statistic of all: Royal Bank of Scotland, for so long the senior partner in a close working relationship, most recently in the consortium that bid for ABN Amro, now has a market cap almost half that of Santander.

The latest addition to the Santander collection, on a value basis, could be the best deal Botín has done to date – subject to possible counter-bids from banks that see that the Spanish have got a steal of a deal for A&L at £1.26 billion.

The price looks even better when you consider that Santander entered negotiations to bring A&L into the Abbey fold in December 2007, and was prepared to pay about £2.7 billion at the time. Euromoney understands that eight months ago the initial approach had actually come from A&L’s board to Abbey but that the deal came to nothing more on structural than price issues. (The due diligence done at this time helped Santander to complete the July negotiations over the course of just one weekend.)

The cost to Santander is higher than the headline price. It will need to inject about £1 billion of capital into the business; if A&L had remained independent, and undertaken the same impairments and adjustments to its book that Abbey’s executives plan, such as winding down the lender’s large treasury portfolio, A&L’s core capital would have fallen below 4%, requiring it to raise capital in a market where even leading lender HBOS had struggled and/or shrinking its business to the point where growth becomes difficult to achieve.

But the deal gets Santander much closer to its target of 10% market share in the UK for a relatively small amount. In effect, A&L adds close to 50% to Abbey’s business. Branch numbers rise from 700 to 950, with most branches in the areas of the England where Abbey had planned to build its network over the next three to four years. Abbey’s deposit base grows 45%. It gains a mortgage book that is 97% prime and with a similar average loan to value to its own. And it gives Abbey/A&L a UK market share of more than 8.5%.