Santander to Purchase Sovereign Bancorp in $1.9 Billion Deal

Santander to Purchase Sovereign Bancorp in $1.9 Billion Deal

Oct. 14 (Bloomberg) -- Banco Santander SA, Spain's biggest lender, agreed to acquire Sovereign Bancorp Inc., the largest surviving U.S. savings and loan, in a stock swap valued at $1.9 billion.

Santander will offer Sovereign's stockholders 0.2924 Banco Santander American Depository Shares for each share they hold, equal to about $3.81 a share, according to a statement yesterday. The Spanish bank already owns 24.35 percent of Sovereign.

Santander Chairman Emilio Botin is snapping up lenders hurt by the global credit crisis. The Spanish bank bought a stake in Sovereign in 2005 and 2006 for $2.9 billion. Santander this year bought Alliance & Leicester Plc and branches and deposits of Bradford & Bingley Plc in the U.K.

``Buying Sovereign shows they have the balance-sheet strength to be able to pick up assets they want at a reasonable price,'' said Andrea Williams, a fund manager at Royal London Asset Management, which has 1.5 billion pounds ($2.6 billion) of European stocks under management.

Sovereign curtailed lending and shrank its balance sheet after posting a $1.3 billion loss in 2007 and as defaults increased. Last month, the lender said it was selling its portfolio of collateralized debt obligations after revealing it may take ``significant'' charges on its holdings of Fannie Mae and Freddie Mac, the nationalized mortgage-finance companies.

Third Quarter

Sovereign, based in Philadelphia, yesterday said it had a third-quarter net loss of $982 million, or $1.48 a share. That included a $575 million impairment charge on preferred holdings in Fannie Mae and Freddie Mac, and a $602 million loss on the sale of collateralized debt obligations, Sovereign said in a statement.

The company hired Paul Perrault, 57, as chief executive officer to start in January, replacing Joseph Campanelli, who left immediately after two years in the job. Chief Financial Officer Kirk Walters is interim CEO. Perrault was chief executive of Chittenden Corp., Vermont's largest bank, where Walters served as CFO.

Sovereign sold debt and 179.7 million shares in May to raise $1.9 billion and omitted its quarterly dividend in January. Profit declined 14 percent in the second quarter on ``continued deterioration in asset quality for the commercial portfolios, particularly in the for-sale housing segment,'' Sovereign said in July.

``It's been apparent for some time that Santander may have to act sooner rather than later in order to protect its investment in Sovereign,'' Sandler O'Neill & Partners LP analysts Joseph Fenech and Casey Orr said in a note to investors Oct. 13.

Prospects `Deteriorate'

Fenech and Orr said Sovereign's ``fundamental prospects continue to deteriorate.'' The Fannie and Freddie writedowns and sale of the CDO portfolio could ``absorb a fairly sizeable portion of the $1.9 billion in new regulatory capital raised,'' they said.

In the fourth quarter of 2007, Santander recorded a 737 million euro charge ($1 billion) on its investment in Sovereign. Sovereign operates in the U.S. with 750 community offices and about 12,000 employees, according to a Sept. 30 statement.

The company became the largest public savings and loan or ``thrift'' in the U.S. last month when Seattle-based Washington Mutual Inc. collapsed and was absorbed by JPMorgan Chase & Co. Fifteen U.S. banks failed this year, the most since 1993.

BLOOMBERG