MADRID/MEXICO CITY Spanish bank Santander (SAN.MC) said on Tuesday it would seek to raise up to 3.4 billion euros ($4.3 billion) through the stock market listing of a quarter of its Mexican unit as it looks to boost capital levels and weather a grinding recession at home.
The euro zone's biggest bank said it would list up to 24.9 percent of Grupo Financiero Santander Mexico in what would be the biggest public offering of a Mexican company to date, valuing the unit at up to 13.7 billion euros.
"The total (raised) in this operation will increase our capital" in Spain, Chairman Emilio Botin, wearing a red tie to match Santander's logo, told a news conference in Mexico City. "Not a peseta will be put toward cleaning up real-estate."
He said Santander, which has been struggling with writedowns from the bursting of the Spanish property bubble, aimed to list other important subsidiaries within five years, and acknowledged economic difficulties back home in Spain.
"Everyone knows the situation in Spain is not like that in Mexico," Botin said. "Mexico's is magnificent, and Spain's ... we're not at our best moment."
The pricing of the offer is between 29 and 33.5 Mexican pesos ($2.20-$2.54) per share, slightly below some analysts' estimates for up to 36 pesos.
The placing of the stock starts on Tuesday and the shares are expected to start trading in Mexico and New York around September 26, the bank said.
The transaction is in two tranches: one in Mexico, for 20 percent of the shares in the global offering, and one outside Mexico, including the United States, representing 80 percent.
These amounts may be subject to reallocation depending on demand, Santander said.
The Mexican unit will join Santander's Latin American subsidiaries in Brazil and Chile on the stock exchange. The lender has yet to list its Argentine and UK businesses. Mexico accounts for about 12 percent of Santander's profit.
Botin said the bank's policy in coming years would be to sell shares in its affiliates around the world, and said such a stake sale in its U.S. unit was a possibility. However, there was no pre-determined order.
"It depends on the market (conditions)," Botin told Reuters, adding the bank had studied the Mexican unit sale for 2-1/2 years.
The biggest share offering of a Mexican firm prior to Santander Mexico was the $2.2 billion flotation in 1991 of Telmex, the telephone company controlled by tycoon Carlos Slim.
The Spanish government is requiring Santander, alongside other Spanish banks, to write down losses on bad real estate investments as the country prepares for a European bailout of its banks.
However, its Mexican unit has a strong capital base and has been doing good business, boosted by a Mexican economy that is expected to grow by around 4 percent in 2012, outperforming its regional peer Brazil for the second year in succession.
"We're quite positive on the outlook for Mexico," said Daragh Quinn, a banking analyst at Nomura in London. "The Mexican financials have a very low weighting in the index, and we would certainly argue there's some pretty decent prospects ahead for the Mexican banking sector.
"Obviously the Spanish connections will undoubtedly be on people's minds," he added, noting investors would be looking for "a better understanding of what the connections are and what the possible risks would be, but not necessarily look for that to be reflected in the price."
Nick Robinson, who oversees Aberdeen Asset Management's Latin American portfolio, said issues at the parent level are not a concern as local subsidiaries tend to have very separate balance sheets.
"This being the obvious key concern investors have, I suspect they will have a robust answer to that issue," said Robinson, adding that Aberdeen, the largest outside shareholder in the Chile unit, is very interested in the Mexico offering.
The expected pricing is just below some market forecasts, but that could be aimed at maximizing investor demand rather than a bid to offer a discount against Spanish woes, Quinn said.
Berenberg bank estimated the deal would reduce Santander's earnings by around 3 percent from 2013 to 2015, but said the capital advantage outweighed potential earnings loss.
"Arguably, it detracts from future earnings growth. But given the market is not paying for growth at the moment, we see the positive development on capital as prevailing," said Marco Troiano, an analyst at Berenberg.
Still, Francisco Riquel at N+1 Equities said the listing of Santander's subsidiaries could lead to the perception of the bank as a holding company.
Santander's first-half net profit was cut in half after it made provisions for losses related to Spanish real estate, prices for which are still falling after the market collapsed in the financial crisis in 2008.
Santander, whose Latin American operations make up half the group's profits, will not be one of the banks receiving international aid.
The listing of the Mexican unit will boost Santander's core capital ratio by around half a percentage point, the group said. ($1 = 0.7947 euros) ($1 = 13.1922 Mexican pesos)
(Additional reporting by Tomas Sarmiento and Simon Gardner in Mexico City; Editing by Sarah Morris, Dave Graham and Leslie Gevirtz)