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Potential deal for Sovereign could signal more M&A
[October 13, 2008]

Potential deal for Sovereign could signal more M&A

(AP Online Via Acquire Media NewsEdge) NEW YORK_Sovereign Bancorp said Monday it is in advanced discussions with Spain's Banco Santander regarding a possible buyout of the Philadelphia-based thrift. Such a deal would extend a wave of consolidation that has recently overcome the banking industry.

Following a slew of acquisitions among the national players, analysts generally expect mid-size, regional banks to be the next in line.

"I will say overall this will be a trend that continues at least through the first half of '09 unless some of these names stabilize," said Matthew Schultheis, senior analyst at Boenning & Scattergood Inc. "It could even last beyond that."

The driving force behind the consolidation is a lack of capital, said Doug Landy, a partner in the U.S. banking practice of law firm Allen & Overy. Large banks and very small banks have a much easier time raising capital than regional banks because big banks can tap into the international markets for cash, while small banks have a local connection.

"A regional bank lacks both the international access and the local character," Landy said.

As the credit markets have tightened and financial stocks have plummeted, investors remain worried about the capital adequacy of banks.

Santander already owns a 25 percent stake in Sovereign, and speculation has mounted that the Spanish bank would seek to protect its investment by orchestrating a takeover of the U.S. company.

Citing people familiar with the matter, the Wall Street Journal reported Sunday that Santander is expected to pay around $3.81 per share, Friday's closing price for Sovereign shares on the New York Stock Exchange.

Based on the number of shares outstanding as of July 21, such a deal would value Sovereign at about $2.53 billion.

"From a valuation perspective, it may be a little early in the game," said Schultheis. "If they (Sovereign) held off, they could probably get a better price. It may simply be an easier out for them."

Sovereign, which has a major presence in the Northeast, has been hit hard in the past year and a half by rising mortgage delinquencies. During the second quarter, Sovereign set aside $132 million for loan losses, compared with $51 million during the year-ago period. The rise in loan-loss reserves during the quarter led to a 14 percent decline in profit for Sovereign.

Shares of Sovereign have plunged nearly 55 percent over the past two weeks and are down 67 percent for the year.

In a note to clients Monday, Friedman, Billings, Ramsey & Co. analyst James Abbott said Santander would not let Sovereign fail because it already owns a stake in the bank. A Sovereign failure would also open up the potential for other banks to bid for the banking assets of Sovereign through a sealed auction by the Federal Deposit Insurance Corp.

When a bank fails, the FDIC takes it over and auctions off the assets to recoup some of the money lost by the failure. Allowing Sovereign to fail could lead to a cheaper price for Santander, but it is likely too risky a move, Abbott wrote.

"Santander has invested too much time, effort, and money in Sovereign thus far to walk away with nothing," Abbott said.

The mid-September bankruptcy of Lehman Brothers Holdings Inc. triggered a tightening of lending conditions and sent many financial institutions scurrying for help, including rival investment bank Merrill Lynch, which was bought by Bank of America Corp. for $50 billion in stock.

Days later, the government seized Seattle-based Washington Mutual Inc., marking the largest bank failure in U.S. history. WaMu's deposits and assets were acquired by J.P. Morgan Chase & Co. for $1.9 billion.

Following a weeklong battle for control of Wachovia Corp., Citigroup Inc. conceded on Thursday to Wells Fargo & Co., which has agreed to buy the Charlotte, N.C.-based bank for $11.7 billion in stock. Originally, the deal was valued at $15.1 billion, or $7 a share, but Wells Fargo stock has declined since it was announced.

While the pool of potential acquirers has become smaller, there are still a number of midlevel domestic and larger international banks, such as Santander, that are in a position of strength that could do a deal.

"I don't think that people who feel they have the balance sheet are going to sit on the sidelines," Schultheis said. "I think there are an adequate number of buyers to keep this going for a while."

Schultheis pointed to banks such as PNC Financial Group Inc., BB&T Corp. and SunTrust Banks Inc. as potential acquirers.

When it comes to likely acquisition targets, National City Corp. and Huntington Bancshares Inc. are two "obvious" choices, he said.

Scott Bleier, president of said just about any smaller size bank is up for grabs at this point, especially those with concentrations in the hardest hit real-estate markets of California, Florida and the Midwest.

Banks based in the Northwest and in the New York tri-state area are more protected, he said.

"The government will probably ask the bigger players to acquire the smaller players," Bleier said. "That is probably the future of most regionals."

And while national banks such as J.P. Morgan Chase and Wells Fargo have already made sizable acquisitions, Bleier expects their franchises to continue to grow.

"They (national banks) are stretched, but the government is going to have to guarantee much of these 'too big to fail' banks," Bleier said.

Banco Santander _ Spain's largest bank by market value _ had total assets of 918 billion euros ($1.45 trillion) as of June 30. Its second-quarter profit declined about 5.3 percent year over year to roughly 2.52 billion euros ($3.98 billion).

Sovereign shares fell 13 cents, or 3.4 percent, to close Monday at $3.68. Banco Santander shares jumped $1.47, or 11 percent, to $14.50.

Copyright ? 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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