Spain's Santander to buy struggling A&L for £1.3bn

Spain's Santander is buying British bank Alliance & Leicester for £1.3 billion (Dh9.54 billion) in an agreed deal that will bulk up its existing UK bank Abbey.

Santander, Europe's second-biggest bank after HSBC, has long been considered a potential buyer of A&L, but has been able to secure a knockdown price after a collapse in its target's share price in the past year.

Santander said it was offering one of its shares for every three A&L shares, plus a cash dividend of 18 pence per share. The deal values A&L stock at 317p, compared with a 12-month high of 1,170 pence. A&L shares soared 54 per cent to 338 pence after Santander confirmed the deal, reflecting the prospect that a takeover battle could ensue. Santander held talks with A&L late last year, sources have said, and analysts said it has the financial firepower to do a deal when many rivals are struggling with the credit crunch.

"It would make perfect sense. If we believe all the reports, before they were looking to buy at above six pounds," said Simon Maughan, analyst at MF Global. He said Santander could use a deal to drive through economies of scale to boost profitability at Abbey, which is low relative to its other operations.

"Even with the cost savings they are planning to drive through at Abbey in the next two to three years, their returns will still be materially less than they make in Europe and a fraction of what they make in South America," he said.

"The merger of A&L with Abbey ... will increase the group's critical mass in the British market," Santander said in a statement, adding that the merged group would have 959 offices and over eight per cent of the British savings and personal loan market.

British rival Lloyds TSB and France's Credit Agricole were also seen as possible predators. Both declined to comment on whether they would be interested. Entrepreneur Clive Cowdery could also be interested after his attempt to buy a stake in lender Bradford & Bingley last month was rejected, though Cowdery's strategy appears to be to buy stakes and inject capital rather than full takeovers. He could not be reached for comment.

B&B shares jumped 14 per cent as the move on A&L stoked the prospect of broader consolidation among UK banks after hefty falls in share prices across the sector. A&L shares had slumped over 75 per cent in the past year, hit by falling profits, higher funding costs and low growth prospects.

Its profits fell 30 per cent last year to £399m and are expected to more than halve again this year to £195m, based on a Reuters Estimates average of 15 forecasts.