Monday 14 July 2008

Santander to the rescue?


The proposed purchase of A&L today took me by surprise (I wish it had not, share price up 50% ina day!). Santander, already the owner of Abbey, will have a huge 40% share of the UK mortgage market - just as the property bubble deflates.


At the same time, as I have noted before many times, the Spanish economy is in meltdown and has no good news coming out of it. Domestic construction in particular, which Santander is heavily exposed to in its loan book, is in a massive slump. Where Santander scores high marks is in not being exposed to the main credit crunch in terms of owning any mortgage-backed securities.

A&L therefore must be seriously undervalued for this deal to make sense, or else the Spanish are nuts. Santander has a very efficient back office system that allows it to beat most other banks to profitability hands down, hence its success. No doubt it sees A&L as a perfect addition to its successful Abbey purchase.

But it is going to take more than that to make this work; Another Spanish-UK mega-takeover comes to mind - Ferrocial buying BAA - a disastrous acquisition all round.

However, could there be another angle? As A&L will have a very odd looking book Santander can write this down to near zero value and book the acquisition as goodwill. Which generates a tax break under Spanish law (up until the EU intervenes). Very shrewd perhaps....

12 comments:

Nick Drew said...

I recall E.ON thinking they could cleverly synergise their two big UK acquisitions (Powergen and TXU) - oooops !

Took 'em several years - not many efficiencies or synergies in sight

james c said...

The deal makes sense if A&L plus the cost savings are worth more than the paper that Santander is issuing.

I would guess that this is the case, unless the mortghage losses on A &L are horrendous. The shareprice, I suspect, had fallen because a rights issue was necessary and undershot fair value.

Once mortgage lending returns to something like normal, Santander will have a huge market share and low cost structure in a market where lots of capacity has been removed.

The paper issued, I suspect may prove to be worth rather less than its current price.

Old BE said...

Maybe they are less gloomy about the UK's prospects than you CU?! What a shame HMG didn't allow a similar takeover of NR, then we might not be in such a dire position today...

Anonymous said...

They may have a very efficient back office but my experience with Abbey is that its service went downhill dramatically after it was taken over by Santander.

CityUnslicker said...

James - Oh there is good potential here.

BE - They think they have a bargain, they may be right, maybe not.

Ryan - Yup, they come bottom for quality service all the time.

Tuscan Tony said...

The Tuscan is prepared to wager 1 litre of finest oil that the Spaniard burn on this, inside 18 months.

Mark Wadsworth said...

40%? Surely not. HBOS is the biggest with about 20%, A&L is quite small (8%?).

Mark Wadsworth said...

13% in total, says .

CityUnslicker said...

MW quite right, meant to say 40% growth on their portfolio.

Anonymous said...

Agree with Ryan. AbbNat used to be first rate in most things, but now crap and unintelligible waffle is all you get in their correspondence, even on the simplest of matters. The new owners seem to have dumped all the literate and experienced managers whose replacements fail to cut the mustard.

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