Santander Buying A&L: Morningstar's View

Morningstar's view on Santander's purchase of Alliance & Leicester.

Erin Davis | 14-07-08 | E-mail Article

Spain's Banco Santander (link will open in a new window) announced Monday that it had agreed to purchase Alliance & Leicester in an all-share transaction valued at approximately GBP 1.26 billion. While we're leaving our fair value estimate unchanged for now, we are pleased with the acquisition; we see it as a logical extension of Santander's U.K. universal banking strategy at an attractive price. We think A&L will mesh fairly easily with Santander's existing U.K. bank, Abbey, and will increase Santander's market share in key areas like business banking for small- to medium-size clients and mortgage lending.

Santander + A&L: A Fair Price?
We've been pleasantly surprised by Santander's well-chosen acquisitions and disposals over the past two years, especially considering how badly the Spanish bank overpaid for a stake in Sovereign in 2005. Santander entered takeover talks with A&L in December, but the talks fell apart when the two parties could not come to terms on price. Negotiations resumed last weekend, and the deal price--only a small premium to tangible book value--can be viewed as a reward for Santander's prudence. Santander agreed to trade one of its own shares for every three A&L shares plus an interim dividend of 18 pence per A&L share. The price, equal to about GBP 3.19 per A&L share, is a 36% premium to Friday's closing price but only a 9% premium to A&L's average share price over the past four weeks.

Santander + A&L: Potential Risks
The deal is not without risk to Santander, which will add GBP 1 billion of its capital to A&L's balance sheet in order to shore up its finances. Santander also plans to significantly deleverage A&L over the next two years by selling off assets, which should reduce A&L's risk and funding costs but will probably also lower its profitability. The U.K. is facing a significant decline in property prices and an increase in delinquent loans. Santander has incorporated higher credit costs into its financial projections, but losses could be higher than expected. The deal must be approved by both Santander's and A&L's shareholders at their meetings in September; it is expected to close in October. We note that the acquisition could fall apart if another bidder offers a higher price for A&L's operations, although we see this as an unlikely possibility.

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