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Santander bids for Alliance & Leicester

Created:
14 July 2008
Written by:
Jonathan Eley

• Santander in agreed all-share bid that values A&L at 299p a share

• Shareholders will also get interim dividend of 18p a share

• Shares bounce 45 per cent to 338p on expectation of a bidding war

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So, the bottom-fishing has begun. Spain's Santander is one of the world's top 10 banks, so its pockets are likely to be deep enough to restore Alliance & Leicester's balance sheet, and it could generate cost savings by merging A&L's back-office functions and branch network with that of Abbey, which it also owns.

There would also be few regulatory objections, as the combination of Abbey and A&L would only have an 8 per cent share of UK unsecured loans. From the point of view of the government, the transfer of the bank to a bigger group would probably be a blessing, as it would reduce the number of financial institutions that might one day require propping up or rescuing.

The bid will be structured as a scheme of arrangement, which means that 75 per cent of A&L shareholders must approve it at an extraordinary meeting. But there's no cash on offer - A&L shareholders will get one Santander share for every three A&L ones. Although Santander shares trade in London, they can't be settled through Crest, so you'll end up with Crest depository interests (CDIs), representing shares in Santander.

A&L shares have spiked higher than the offer price in the expectation that a bidding war might erupt. Lloyds TSB (which itself tried to buy Abbey National a few years ago) might fancy a tilt, and France's Credit Agricole has also been linked to A&L in the past. Clive Cowdrey, the man who tried to broker an alternative rescue plan for Bradford & Bingley, is also known to have a plan for consolidating the smaller end of the UK banking sector. A&L has undertaken not to solicit rival offers, though.

SHARE TIP UPDATE:

Sell

This is certainly better news for A&L shareholders than a cash call, or months of uncertainty and innuendo about the bank's financial health. So hats off to the management for facing up to market conditions and securing an exit for shareholders - albeit one that will still leave many nursing losses. We advised selling Alliance & Leicester shares at 522p earlier this year (20 March 2008) and, even after today's spike, they're still down 35 per cent on that advice. The value of this bid will fluctuate with movements in Santander's share price, and we think a serious rival bid is unlikely - so take advantage of the premium the market is offering you, and sell the shares now.

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