Santander sells stake in U.S. consumer unit

Residents walk in front of a Santander bank branch in downtown Montevideo June 4, 2010.

(Reuters) - Private equity firms, including Warburg Pincus WP.UL and KKR & Co (KKR.N), are buying a 25 percent stake in Banco Santander SA's (SAN.MC) U.S. consumer finance business for $1 billion, in a bid that the market for Americans with limited access to banking services will grow.

Santander, the euro zone's biggest bank, said on Friday it will book a $1 billion gain from the sale, at a time when pressure is mounting on European banks to strengthen capital.

Santander will retain a 65 percent stake in the unit, Santander Consumer USA.

Warburg and KKR are taking equal economic stakes in the deal, while Centerbridge Partners will have a smaller stake, a source familiar with the situation said.

The unit's chief executive, Thomas Dundon, is also investing another $115 million for a 10 percent stake.

The deal is the latest private equity foray in the U.S. consumer finance business, as these firms look to take advantage of a shrinking supply of consumer loans to people with credit problems as large banks exit the market.

Warburg, for example, has made a series of investments in companies providing financial services to low-income consumers.

It has invested in Mutual Fund Store, which gives financial advice and sells mutual funds to such consumers, as well as Primerica Inc (PRI.N), the largest distributor of insurance and mutual funds to these consumers.

Centerbridge is bidding for Citigroup Inc's (C.N) OneMain Financial consumer finance business. Last year, Fortress Investment Group bought most of American International Group Inc's (AIG.N) consumer finance unit.

The U.S. consumer finance business is one of Santander's most profitable units, analysts said, and posted net profit of $455 million for 2010.

Still, with the U.S. economy remaining weak, lending to nonprime consumers is risky, and the investors spent $9 million on due diligence for the company, the source said.

Moreover, depending on the unit's performance in 2014 and 2015, either the private equity investors or Santander might have to pay up to $595 million to the other side.

The new capital will be used by the business to fund growth, the source said.

"It's got a tremendous market opportunity in front of it, and to take advantage of that market opportunity, the company needs capital," the source said.

Santander shares closed up 2.9 percent to 6.026 euros.

Goldman Sachs Group Inc (GS.N), Bank of America Corp (BAC.N) and Citigroup advised the company, with Cravath, Swaine & Moore acting as the legal advisers.

Deutsche Bank AG (DBKGn.DE) and Barclays Plc's (BARC.L) Barclays Capital advised the private equity firms, while Simpson Thacher & Bartlett acted as their legal counsel.

(Reporting by Paritosh Bansal in New York and Martin Roberts in Madrid; Writing by Judy MacInnes; Editing by Gerald E. McCormick, Bernard Orr)