MADRID Spanish bank Santander (SAN.MC) launched a buyout offer for the remaining 25 percent of its Brazilian unit, cementing its grip on one of its top profit drivers in a deal worth up to 4.7 billion euros ($6.5 billion).
The transaction, which the euro zone's biggest bank will pay for in newly-issued shares, marks an exception to its strategy of recent years of floating foreign divisions whenever possible to bring in minority shareholders.
It also reflects Santander's confidence in its finances as its first quarter profits rose 8 percent ahead of Europe's toughest banking stress tests yet, which the region hopes will help it draw a line under the financial crisis.
Chief Executive Javier Marin told analysts the Brazilian buyout would not change its approach to other listed divisions, adding a long-mooted public offering of its UK unit would still take place, in the "mid-term."
The bank said the Brazilian offer signaled its long-term trust in the country's prospects, after slowing economic growth dampened earnings last year and pushed bad debts up even as the business remained one of the biggest contributors to net income.
It is also financially attractive for the parent company.
Santander is offering stakeholders a 20 percent premium on the Brazilian unit's shares, but these have lost nearly half their value since they were listed at 23.5 reals ($10.5) in October 2009. They closed on Monday at 12.74 reals.
"It sends a confident message about the management outlook on Brazil and confirms Santander's dealmaking credentials," Macquarie banking analyst Benjie Creelan-Sandford said in a note to clients.
Santander shares, which have risen over 13 percent this year, were up 0.8 percent at 7.10 euros at 1045 GMT.
The deal comes at a time when Santander's earnings mix, heavily reliant on Latin America in recent years as many European countries suffered economic downturns, is shifting.
Santander said on Tuesday that in the first quarter Europe provided just over half its net income, which rose to 1.3 billion euros. Profits in continental Europe rose 64 percent quarter on quarter and 53 percent on the year.
Its UK unit - where revenues in pounds rose 13 percent from the first quarter of 2013 on a sharp rise in margins and an improving economy - was now on par with Brazil in providing a fifth of total profits, it said.
Santander's veteran Chairman Emilio Botin, a shrewd dealmaker who, at 79, is still the lender's main strategist, has driven its expansion through overseas acquisitions.
But the bank has faced its share of woes in recent years. Losses on property loans in Spain, which led some peers into state bailouts following a real estate crash, have dragged on earnings.
In Brazil, Santander's net income dropped 10 percent from a year ago to 364 million euros, though this was a 24 percent improvement on the last three months of 2013. The Spanish unit's profit rose 24 percent year on year to 251 million euros.
But Santander's bad debts as percentage of total credit in Spain and Brazil edged up slightly at the end of March compared to end December, even if at a group level the ratio dipped to 5.52 percent from 6.61 percent.
Several smaller Spanish banks reported falls in their bad loan rate in the first quarter.
Santander said the Brazilian buyout would help group profits grow 7 percent in 2015 and in 2016, equivalent to a boost of around 560 million euros in 2016.
"Despite a few uncertainties in the short term over Brazil, we are optimistic about the long-term evolution of Santander Brasil," the bank said in a presentation.
The Brazilian government this week said the economy should grow by 2.3 percent this year, the same rate it posted in 2013, as a global economic outlook improves.
Santander said it would have to issue about 665 million shares, equivalent to about 5.8 percent of its capital, to pay for the buyout deal if all minority shareholders took up the offer. There is no minimal acceptance level.
The new shares from the parent company would then trade in Brazil, and the bank said it did not plan to de-list the Brazilian unit from the Sao Paulo or New York stock exchanges.
It added the buyout would have very little impact on its capital levels, which have long been under scrutiny. Analysts and investors have highlighted the parent group lagged some European peers in terms of solvency levels.
Santander said its core capital ratio was 10.6 percent under Basel III criteria at end-March, above minimum requirements.
It planned to have a core capital ratio of 9 percent by year end under Basel III 'fully-loaded' criteria, which takes into account changes that need to be made by 2019.
Its net interest income at group level, or earnings on loans minus deposit costs, fell 3 percent in the first quarter from a year ago to 6.9 billion euros. This was above the 6.6 billion euros forecast by analysts in a Reuters poll.
Profits missed forecasts slightly.
Santander said it had not booked the more than 1 billion euros in one-off gains from the sale of several units to help profits in the first quarter, adding it was setting these aside, though it did not detail for what.
($1 = 2.2422 Brazilian reals)
(Additional reporting by Tomas Cobos and Julien Toyer and Steve Slater in London, Editing by Julien Toyer, Sophie Walker and John Stonestreet)