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

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.

British rival Lloyds TSB (LLOY.L) and France's Credit Agricole (CAGR.PA) were also seen as possible predators. Both declined to comment on whether they would be interested.

Entrepreneur Clive Cowdery could also be interested after saying he wanted to consolidate smaller UK lenders, but his strategy is more likely to buy stakes rather than pursue full takeovers. He could not immediately be reached for comment.

Bradford and Bingley BB.L shares jumped 14 percent as the move on A&L stoked the prospect of broader consolidation among UK banks after hefty falls in share prices across the sector.

A&L shares had slumped over 75 percent in the past year, hit by falling profits, higher funding costs and low growth.

Its profits fell 30 percent last year to 399 million pounds and are expected to more than halve again this year to 195 million, based on a Reuters Estimates average from 15 forecasts.

Unlike several domestic rivals, A&L hasn't had to raise funds from shareholders, but sharply higher funding costs, losses on risky assets and reduced mortgage lending will hit earnings.

Abbey has benefited from other UK lenders scaling back, as the financial backing of Santander has seen it take a far greater lending market share than usual, analysts estimate.

(Additional reporting by Myles Nelligan in London, editing by Will Waterman/Rory Channing)