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Cut-price sale of AIB's stake in M&T looms

* Analysts expect M&T stake to be sold at a discount

* Santander seen reaching its limit for acquisitions

* AIB target of 2.5 bln euros from disposals looks tough

* AIB to struggle to attract investors in equity issue

* AIB shares down 4.2 percent

By Paul Hoskins and Steve Slater

DUBLIN/LONDON, Oct 6 (Reuters) - A cut-price sale of Allied Irish Banks' ALBK.I stake in U.S. group M&T Bank Corp MTB.N loomed on Wednesday after Spanish lender Santander SAN.MC walked away, its appetite for stressed assets apparently sated.

AIB shares were down 4.2 percent at 1100 GMT.

“Following the breakdown of talks ... the ability for AIB to achieve a premium for its (M&T) stake evaporated,” NCB analyst Ciaran Callaghan said in a research note. “A placing will more than likely have to come at a discount to current share levels.”

That was more bad news for AIB ALBK.L, once Ireland's biggest bank and now trying to plug a 10.4 billion euro ($14.4 billion) hole in its balance sheet caused by a near fatal courtship of property developers during the "Celtic Tiger" boom.

AIB shares now trade at less than 2 percent of a 24.39 euro peak hit in early 2007 before Ireland’s property boom began to unravel.

AIB said late on Tuesday it would sell its 22 percent M&T stake, currently valued at around $2.2 billion, in a public offering underwritten by Morgan Stanley and Citigroup. The pricing will be announced later. [ID:nLDE69429M]

The decision came after AIB failed to sell to Santander which last month agreed to buy the Irish bank's 70 percent stake in Bank Zachodni BZWB.WA, Poland's third largest bank, as part of a 3.1 billion euro deal. [ID:nNLDE68910]

Emilio Botin, Santander’s executive chairman with a reputation as a shrewd and opportunistic operator, has been busy picking up assets being sold on the cheap by rivals hurt during the financial crisis.

As well as Zachodni, Santander has struck five other deals this year -- over 300 British branches from Royal Bank of Scotland RBS.L, a buyout of a minority stake in its Mexico business, SEB's German business, and two U.S. auto loan portfolios -- that have cut its once enviable capital strength.

Barclays Capital analysts said last Friday the deals could leave Santander “significantly undercapitalised” compared to rivals, potentially by as much as 20 billion euros.

“We view company capital guidance as optimistic: adjusting for transactions announced to date, we estimate that Santander’s equity Tier 1 ratio falls to 6.8 percent by the end of 2011,” they said.

AIB APPETITE WANES

Santander has rejected worries about its capital position, saying its core capital will remain above 8 percent and should finish 2011 around the current level of 8.6 percent, lifted by retained earnings and a dividend in shares.

The bank declined to comment on Wednesday on AIB’s plans to sell its M&T stake in a public offering.

Ireland’s financial regulator stunned investors and AIB management last week when it said the bank would need an additional capital infusion of 3 billion euros on top of an existing requirement of 7.4 billion euros.

Before the regulator’s bombshell, AIB had hoped to raise its capital target with disposals and a rights issue.

The government, which owns 19 percent of AIB, will underwrite a 5.4 billion euro capital raising next month. Analysts expect it will end up owning about 90 percent.

The latest bailout for AIB is part of an overall bill of up to 50 billion euros to clean up years of reckless lending by Irish banks. The cost will saddle taxpayers with years of cutbacks and tax increases. [ID:nLDE68T04M]

The capital raising and sale of its Polish business still leave AIB needing to find 2.5 billion euros from disposals.

Davy analyst Stephen Lyons said that now looked something of a stretch, dampening likely interest in the equity issue.

“After the disappointment of last week, the long awaited announcement of the M&T disposal has lost much of its lustre,” Lyons wrote. “It will be a challenge to attract investor interest in the equity raise next month and it looks like it will result in majority government ownership.” (Additional reporting by Jesus Aguado in Madrid; Editing by Dan Lalor) ($1 = 0.7219 euro)

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