Breakingviews - Santander’s $2.9 bln Mexico bid is easy to refuse

The logo of Santander bank is seen on the wall of a branch in Monterrey, Mexico November 24, 2016. Picture taken November 24, 2016. REUTERS/Daniel Becerril

LONDON (Reuters Breakingviews) - Banco Santander has made shareholders in its Mexican unit a proposal they can refuse. The Spanish bank on Friday offered investors in Santander Mexico the chance to swap their shares for stock in the parent company. Despite a 14 percent premium, the deal is unenticing. Investors should hold out.

When Emilio Botin, the Madrid-based group’s late patriarch, floated 25 percent of the Mexican subsidiary in September 2012 it was trumpeted as a “new phase” in the bank’s history. That vision hasn’t panned out. Shares in the unit closed at 28.4 pesos on Thursday, 9 percent below the initial public offering price.

Taking back full ownership makes sense for Santander. Executive Chairman Ana Botin this month set out a strategy to allocate capital to more profitable Latin American businesses. If all Mexican shareholders accept the swap, the bank’s share count will expand by a modest 3.5 percent.

A stake in the $83 billion company would offer Mexican investors more diversified earnings, exposure to Brazil – Santander’s biggest market – and greater protection from any economic fallout if U.S. President Donald Trump acts on his anti-Mexico rhetoric. And while the offer worth about 32 pesos per share is roughly the same price at which Santander sold the shares almost seven years ago, it’s higher than the target most analysts had put on the stock, according to the bank.

The deal values the local lender at around 1.6 times its estimated 2019 book value. That looks on the low side for a bank that earned a robust 20 percent return on tangible equity (ROTE) last year. If Santander Mexico’s pre-tax profit grows by 8 percent this year, and assuming a 14 percent cost of capital, the shares merit a valuation closer to two times the bank’s net asset value, according to Breakingviews calculations.

It’s true that Mexico faces a cloudier outlook. The economy grew less than first estimated in the fourth quarter as activity contracted in December, the first month of new President Andrés Manuel López Obrador’s administration. Besides, Santander is the only buyer for the shares.

Nevertheless, a slowdown doesn’t necessarily preclude high returns: Santander’s Brazilian subsidiary also earned a 20 percent ROTE last year even though the economy expanded by a modest 1.1 percent. Mexican shareholders can afford to wait for a better offer.


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