Banco Santander SA, Spain’s largest bank, agreed to pay $2.5 billion in cash to buy a stake in its Mexican unit that it sold to Bank of America Corp. in 2003.
The purchase of Bank of America’s 24.9 per cent holding will lift Santander’s ownership of the Mexican division to almost 100 per cent, the bank said in a statement on Wednesday. The acquisition will increase earnings per share by 1.3 percent in the first year, the Santander, Spain-based bank estimated.
Santander is reversing the stake sale made seven years ago even as concerns about Spain’s public finances drag on the company’s shares. Bank of America is selling less than a month after announcing plans to shed its stake in Brazilian lender Itau Unibanco Holding SA as it strives to boost capital.
“If they have the wherewithal at Santander to make this kind of move, it does show some kind of confidence that they are not in the kind of difficulty that the price of their shares implies at the moment,” said Kevin Lilley, a fund manager at Royal London Asset Management, which oversees about 1.25 billion euros ($1.5 billion) in continental European stocks, including Santander.
Santander rose as much as 2.9 per cent in Madrid trading, and was 2.6 per cent higher at 7.55 euros by 2:10 p.m. The shares declined 35 per cent this year.
Bigger Contribution
“The acquisition reinforces Santander’s commitment to Mexico, a country with a very positive outlook for growth, and furthers the geographic diversification of our group,” Emilio Botin, Santander’s chairman, said in a statement.
The purchase of the stake in Mexico’s third-biggest bank by business volume will boost the contribution the country makes to Santander’s earnings to 7 per cent from 5 per cent, the bank said.
Santander sold the stake to the Charlotte, North Carolina- based bank in 2003 for $1.6 billion after reporting its first annual profit drop in 15 years in 2002. The bank offloaded more than $7 billion of assets in Latin America and Europe in 2002 as Santander retrenched after a debt default in Argentina and a plunging Brazilian currency hit profit.
Bank of America’s investment in Santander’s Mexican business was a bet on economic growth in the country, business generated by ties to the Hispanic community in the U.S. and trade links between the two countries, analysts said at the time. Bank of America had agreed to hold the stake for at least three years and after that either sell it back to Santander or to investors.
Preserving Capital
Chief Executive Officer Brian Moynihan pledged at Bank of America’s April annual meeting that the lender would preserve capital to avoid future government bailouts. The Itau transaction is worth about $4.4 billion, spokesman Jerry Dubrowski said May 19.
Bank of America repaid $45 billion in Troubled Asset Relief Program funds in December after raising more than $19 billion in the largest share sale by a U.S. company since at least 2000. As part of the repayment, the lender pledged to sell assets to produce a net gain of $3 billion by June 30.
The purchase will reduce Santander’s core capital, which was 8.8 percent in March, by 31 basis points, the bank said. A basis point is a hundredth of a percentage point. While investors are sensitive to the capital needs of banks at the moment, the amount lost represents about the amount Santander can generate from its profit in a single quarter, said Claire Kane, an analyst at MF Global in London who rates Santander “buy.” “It’s sign of confidence that they’re willing to go out and make these purchases,” said Kane. “They’re buying back a stake in a profitable business that they sold in 2003 when they needed capital and now the situation is in reverse.”
