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Santander to pay $2.4B for Sovereign stake

Spain's Banco Santander Central Hispano SA on Monday said it will pay $2.4 billion for a 20 percent stake in Philadelphia-based Sovereign Bancorp Inc., which plans to use the proceeds to expand in New York City.
An office of Sovereign Bank is seen Monday in Philadelphia. Spain's Banco Santander Central Hispano said Monday it will take a 20 percent stake in Philadelphia-based Sovereign Bancorp Inc.George Widman / AP
/ Source: The Associated Press

Spain's Banco Santander Central Hispano SA on Monday said it will pay $2.4 billion for a 20 percent stake in Philadelphia-based Sovereign Bancorp Inc., which plans to use the proceeds to expand in New York City.

Sovereign, the nation's third-largest savings and loan, reached an agreement to acquire Brooklyn-based Independence Community Bank Corp. for $3.6 billion. The agreements simultaneously give Santander re-entry into the coveted U.S. retail banking market, and Sovereign more reach in the New York City Metropolitan area.

The investment gives Santander the right to negotiate a complete takeover of Sovereign after two years. Santander also will appoint two new members to Sovereign's board of directors, and Sovereign head Jay Sidhu will serve on the Spanish bank's board.

"This transaction provides Santander an opportunity to increase its investments in financial institutions and enter the United States by establishing a partnership with Sovereign and Independence," said Sidhu, who is chairman, president and CEO, in a statement.

The equity stake comes as Sovereign is facing a challenge from its largest investor, which wants to nominate two of its principals to the bank's board of directors. San Diego-based asset management firm Relational Investors LLC, which owns 7.3 percent of Sovereign's outstanding common stock, has criticized the bank for what it considers to be a lagging share price and unfair director bonus plan.

Relational founder and principal Ralph Whitworth called the deal "a transferring of shareholder wealth so they can consolidate control over the company." Whitworth said Santander's stake is low enough to avoid the need for shareholder approval, and that his own firm's investment in Sovereign will drop to below 5 percent because of the additional shares issued.

"The only reason for this is to consolidate some friendly votes, but this will further inflame shareholders," he said.

Banco Santander, Spain's largest financial institution, has been active in making key acquisitions and investments during the past few years. It most recently acquired Britain's Abbey National for $15.4 billion, and has stakes in other financial firms around the world.

The investment gives Santander another crack at breaking into the U.S. market. The Madrid-based bank had acquired a stake in First Fidelity Bancorp in 1991, but sold it five years later for some $2.1 billion.

Santander must wait two years before it can buy Sovereign outright. Once that window expires, Santander has one year in which it agreed to pay $40 per share to buy the rest of Sovereign it doesn't already own. After that, it will have another two years to make a bid "at market prices."

In the near-term, Santander can raise its 19.8 percent stake to 24.9 percent once certain conditions are met. The Spanish bank offered $27 per share for the Sovereign stake.

Analysts remain concerned that the timing might not be right for Sovereign to pursue another acquisition _ especially with a challenge from Relational.

"If this action is Sovereign's way of counteracting the Relational actions, we believe investors will be upset with the fact they could turn right to another M&A deal," said Banc of America Securities analyst Kenneth Usdin said in a report. "We believe investors want Sovereign to work on improving fundamental performance without undertaking transaction risk and taking the eye off the ball on the core operations of the business."

Sidhu built the company into a northeastern banking powerhouse through a succession of acquisitions during the past six years. His most notable was the acquisition of 278 branches of Fleet Financial Corp. in 1999. Regulators required Fleet to shed the branches after it acquired BankBoston Corp.

Sovereign Bancorp now has assets of $63 billion, more than 650 branches from New Hampshire to Maryland and about 10,000 employees.

Independence Community Bank, which is being offered $42 per share in cash, has $18.5 billion of assets and a market value of $2.71 billion. The bank has some 120 branches in New York and New Jersey, and operates SI Bank & Trust after last year's acquisition of Staten Island Bancorp.

The company has often been rumored as a prime takeover candidate for banks interested in making a strong entrance into the New York City market, an area already dominated by financial giants such as Citigroup and JPMorgan Chase.

Sovereign shares were halted at $23.37 on the New York Stock Exchange and did not reopen Monday. Independence shares also were halted at $32.45 on the Nasdaq.