Santander eyes Sovereign in hunt for bargains

By Paul Day and Elinor Comlay

MADRID/NEW YORK (Reuters) - Spain's Santander (SAN.MC) said it was in talks to acquire Sovereign Bancorp Inc SOV.N as the euro zone's largest bank hunted for bargains in a sector pummeled by the global financial crisis.

A source familiar with the matter said Santander was expected to pay $3.81 a share, or a total of $1.9 billion, for the stake in the U.S. bank it does not already hold. That matches Sovereign's closing price on Friday.

In a statement on Monday, Sovereign confirmed it was in "advanced discussions" with Santander.

In 2006, Santander paid $3.3 billion for 24.9 percent of Sovereign, becoming the largest shareholder of the U.S. savings and loan.

"This is a very attractive price and ... is strategically positive because it will allow Santander to strengthen its position in the United States and apply its business model to a company it knows," Spanish brokerage Renta 4 said in a note to investors.

Under an original agreement, Santander could not make a bid for the remaining stake it did not already own in Sovereign at market value until June 2009, though the rumoured price suggested Sovereign had brokered the takeover talks.

RISK CONCERNS

Like most U.S. banks, Sovereign has been hit by toxic debts emerging from the country's subprime crisis. In the second quarter it reported a 14 percent drop in net profit to $127.4 million.

To shore up capital, Sovereign raised $1.9 billion in May and has eliminated its dividend for this year.

The bank also hired Chief Executive Paul Perrault at the end of the month, signaling to some that it did not intend to sell itself in the near term.

In a research report, Sandler O'Neill + Partners analysts noted Perrault is unlikely to have come on board if the bank was looking for just a short-term CEO. The analysts suggested that either Santander was consulted on the hire or the deal has been discussed for some time and Perrault took the role on the understanding he will run Sovereign after its acquisition.

The analysts reiterated a "hold" rating on Sovereign stock, noting, "While SOV's fundamental prospects continue to deteriorate, we don't think the risk/reward tradeoff favors selling the stock at these levels."

Sovereign shares were down 15 cents, or nearly 4 percent, at $3.66 in afternoon trading on the New York Stock Exchange, underperforming the KBW Banks index .BKX, which was little changed. The shares are down 79 percent from their level a year ago.

"I don't think you're going to see material upside to where Sovereign is trading right now," said Matthew Kelley, senior research analyst at independent brokerage Sterne Agee. He sees Sovereign's talks with Santander as an indication the thrift needs more capital.

For Santander, a buyout would raise concerns over the Spanish group's aggressive acquisition policy, which this year has sucked up British bank Bradford & Bingley's BB.L deposits and branch network and Alliance & Leicester Plc.