Abbey National CEO Luqman Arnold is selling the UK mortgage bank for only a small premium to its share price. Yet he has said that the decline in Abbey’s performance will end this year. So why choose now to recommend a deal with Spain’s Santander Central Hispano?
The fact is that Arnold has been cornered.
He cannot easily demonstrate that Abbey is worth more today than the 560p a share that Santander is offering. And given Abbey’s history of rejecting bids, or letting them slip through its fingers, he daren’t turn Santander away in the hope of selling for more later.
Abbey’s only defence against a bid was its inflated share price. This has turned out to be a phantom deterrent. The Spanish have found enough synergies to justify offering a modest premium. And because Arnold has no other defences, they do not need to offer much more than this.
Consider an organic defence. Arnold would have to show that Abbey was capable of a dramatic turnround. Even if the rot stopped in the second half, it would be hard to argue that Abbey deserved a premium valuation. Valuing forecast earnings on a market multiple and adding in the value of excess capital would imply a share price of between only 430p and 450p.
Limited recovery
Arnold’s decision to rubberstamp Santander’s bid implies that the turnround will be undramatic. The bank is coming from a low base, having slashed prices to arrest an attrition of market share. Yet there is only limited evidence that Abbey has regained much pricing power in its mortgage business. Meanwhile, its savings business is losing customers in droves.
Now consider Arnold’s other potential reason for rejecting Santander’s offer: a possible bid from a UK institution. Barclays or Lloyds TSB could afford to pay much more than Santander given their greater scope for synergies.
The snag is that such a bid would probably be referred to the anti-monopoly authorities. Even assuming shareholders were content to wait several months for a bid to be cleared, the uncertainty in the meantime would pose serious risks to Abbey’s trading. Those risks are arguably greater than the prospects for a domestic bid clearance.
The deeper question is whether Arnold’s options really were so limited.
Think again about an organic defence. Judging by Santander’s plans, Abbey’s turnround could have been accelerated. Santander appears to be planning to boosting the bank’s ability to cross-sell highly profitable general insurance and investment products. It also aims to extract £300 million from Abbey’s £1.6 billion ($2.9 billion) cost base. Arguably, Arnold could do the same. And to some extent he has.
But to really fight off Santander would have meant launching a defence similar to that adopted by UK retailer Marks & Spencer against retail entrepreneur Philip Green. Arnold would have had to step down to make room for a more reputable retail banker, someone the market believed could deliver the benefits of a turnround that would otherwise be shared with Santander shareholders.
Two hurdles – not obstacles – stand in the way of such a plan.
For starters, it would probably be hard to attract the right candidate. Abbey is well known, but it is no icon like M&S.
A further doubt is whether Abbey’s own institutional shareholders have the stomach for a fight. They have just lost out on a bid for M&S after the UK retailer mounted a defence that prompted Philip Green to pull out rather than pay a higher price. Trying to squeeze more from Santander would involve risking the same outcome.
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