Santander to buy UK bank A&L in $2.6 bln deal

By Steve Slater and Andrew Hay

LONDON/MADRID (Reuters) - Spain's Santander (SAN.MC) is buying British bank Alliance & Leicester ALLL.L for 1.3 billion pounds ($2.6 billion) in an agreed deal that will bulk up its existing UK bank Abbey.

Santander, Europe's second-biggest bank after HSBC (HSBA.L) and long considered a potential buyer of A&L, has been able to secure a knockdown price after a collapse in its target's share price in the past year.

Santander said it was offering one of its shares for every three A&L shares, plus a cash dividend of 18 pence per share. The deal values A&L stock at 317p, well down from over 1,000p a year ago but a 45 percent premium to Friday's closing price.

A&L shares had soared 46 percent to 320 pence by 7:45 a.m. EDT, having earlier hit 338.75p. Analysts said pressure on capital at most banks was likely to deter a counterbid, but some investors expected one.

"They are acquiring Alliance & Leicester on giveaway terms," said David Cumming, head of UK equities at Standard Life Investments, which has a 2.4 percent A&L stake. "I would be amazed if no one else counters with a higher offer in the next few months," he added.

Santander shares were up 1 percent at 11.35 euros.

Santander said it will inject 1 billion pounds of capital into A&L to provide it with a cushion in current difficult conditions, and plans to shrink the assets of the combined A&L and Abbey by 20 billion-30 billion pounds over two years.

It expects to reap annual cost savings of 180 million pounds by 2011 and will put A&L on its Partenon IT platform.

Guy de Blonay, fund manager at New Star Asset Management, said Santander is taking advantage of "a very opportunistic situation" following a collapse in A&L's share price to consolidate and push through more cost savings.

"In the medium term there is quite a lot of value that could be created for Santander shareholders, but the risk is the Alliance & Leicester mortgage book deteriorates and they are increasing their exposure to the UK mortgage market in a difficult period," said de Blonay, who holds Santander stock.

LONG COURTSHIP

Santander held talks with A&L late last year when its share price was more than double its current offer, sources have said.

But the credit crunch has hit all bank valuations, and Santander has the financial firepower to do a deal when many rivals are struggling with their own balance sheets.

The merger of A&L with Abbey will give Santander 959 UK branches, a mortgage market share of around 13 percent, and over 8 percent of the savings and personal loan market.

Simon Maughan, analyst at MF Global, said the deal would help Santander boost its returns from Abbey, which are low relative to elsewhere in Europe and far below its profitability on its South American businesses.