UPDATE 1-Sovereign ex-CEO Sidhu was interested in bid-source

(Adds Sidhu comments)

By Paritosh Bansal

NEW YORK Dec 18 (Reuters) - Sovereign Bancorp Inc's SOV.N former chief executive, Jay Sidhu, last month proposed pursuing a $4 billion bid for the thrift, according to a source, but the board turned down the proposal in favor of an existing deal with Spain's Banco Santander (SAN.MC).

Sidhu declined to comment on whether he had any interest in pursuing a bid for Sovereign on Thursday, but added that he thought that the deal with Santander did not pay shareholders enough.

"Banco Santander themselves have publicly stated that they expect to earn over $700 million at Sovereign within two years," Sidhu told Reuters. "Paying less than a total of $2 billion for those earnings looks like a steal to me."

In October, Santander announced a $1.9 billion, or $3.81 per share, all-stock deal to buy the 75.65 percent piece of Sovereign that it did not already own. The U.S. Federal Reserve approved the deal earlier this month.

The companies said at the time that Sovereign was projected to post a net profit of $750 million in 2011.

Sovereign's board received a letter from a third party on Nov. 11 expressing an interest in putting together a deal to buy the company for $6 per share in cash, according to a filing with the Securities and Exchange Commission this week.

The third party was an investment firm affiliated with Sidhu, a person close to the situation said.

The letter to the Sovereign board did not identify private equity co-investors that were being proposed for the deal or any source of financing, according to the filing.

It also asked Sovereign for a fee of $10 million to do due diligence and a "value enhancement fee" subject to a maximum of $95 million, the filing said.

Sidhu was ousted as CEO in October 2006 after being faulted by investors for a low share price and for selling a stake in the Philadelphia lender to Santander. (For more M&A news and our DealZone blog, go to www.reuters.com/deals) (Editing by Jeffrey Benkoe)