Emilio Botín, the larger-than-life Spanish banker, arrived in the City of London with what he thought was a knock out offer for mortgage bank Abbey. At first, the markets reacted favourably, then as the dust settled questions were asked. Ian Fraser reports
EMILIO Botín must have been hoping for a better reception. It seemed the 69-year-old Spaniard was anticipating that his audacious £8.15 billion takeover bid for Abbey National would get a rapturous reception as he unveiled it to analysts and investors in an office overlooking the City of London last Monday.
Botín — a big game hunter whose trophies hang in his Madrid office — may have thought he would dazzle Abbey’s shareholders, and even the UK media, with the merits of the offer. But he was sorely mistaken.
Botín, a fourth-generation Basque banker, may have thought his derring-do in proposing the first cross-border banking takeover in European banking history would mean Abbey shareholders would turn a blind eye to the price, which valued the troubled bancassurance group’s shares at around 550p.
His confidence had doubtless been bolstered by the acquiescence of the Abbey board, led by chair Lord Terrence Burns and chief executive Luqman Arnold, who had opted to recommend Banco Santander Central Hispano’s bid.
The Santander chairman described it as a “once in a lifetime opportunity”.
But he has since been spending many hours in further meetings with institutional investors in both Madrid and London, attempting to convince them that the takeover is worth accepting.
Botín’s motivations were clear. The ambitious Spaniard and his blue-chip financial advisers at Goldman Sachs, Merrill Lynch and JP Morgan thought they had spotted a bargain basement entree into the highly profitable UK banking market, a bank with 741 branches.
And they had also identified a passport to reducing Santander’s dependence on the volatile Latin American market.
At analysts’ meetings last week, Botín said: “We will form a unique financial institution — a large multi-local bank, founded in the retail business with a significant potential for growth. Santander has a track record of growing organically, but we’re prepared to take advantage of opportunities when they appear.”
Botín’s desire to reduce Santander’s exposure to the volatile economies of Latin America is understandable.
He lived through a nail-biting experience two years ago, when Santander’s shares plunged by 53% between April and October 2002, as Brazilian bonds plunged before presidential elections on concern the new government might default. Santander had the dubious honour of being the biggest holder of Brazilian bonds among foreign banks.
At the analyst meeting on Monday, Botín said: “With this deal we would see 70% of group profits from AA or better rated countries. It would reduce the potential volatility of group earnings.”
But the majority of Abbey shareholders — both institutional and retail — do not seem to be too interested in such niceties. Most have done their fair share of grumbling in the past five days and many have been quietly dumping Abbey shares.
It didn’t help matters that the Santander share price drifted south over the course of last week. This meant that its offer — which proffers one share in Santander and 31p in cash for every Abbey share — had shrunk in value from around 578p when the bid was announced on Monday to 567p. Remember, before Abbey so disastrously lost its way under now ousted chief executive Ian Harley, its shares had reached a peak of £14 in 1999.
Derek Mitchell, head of UK equities at Isis Asset Management, said: “[Abbey CEO] Luqman Arnold has rolled over too quickly. They could have achieved a better price and a better deal for shareholders. Normally in these circumstances the board doesn’t just roll over at the first offer, they usually hold out for more.”
One retail investor from Dublin told the BBC news website: “I believe that this offer represents incredibly bad value for shareholders. Moreover if I had wanted to hold Spanish stock I would have purchased it already … Abbey is being given away, and Arnold and Hester are cashing in too soon.”
The mood music across the Bay of Biscay was not much more promising. “We are really amazed that they are buying such a big, loss-making mortgage bank in a market where the central bank is raising interest rates to take the air out of a real-estate bubble,” said Jose-Luis Campos, a fund manager at Profit SA in Madrid, which owns shares in Santander.
Patrick Lemmens, a fund manager at ABN Amro Asset Management in Amsterdam, told Bloomberg News: “This acquisition doesn’t make me jump up and down with joy.”
Isis’s Mitchell adds: “The market would have preferred a clean cash bid.”
Mitchell said this is because many of the funds that hold Abbey stock are only allowed to invest in the UK market. This probably lies behind the decision by Standard Life Investments to sell off its entire Abbey stake last week. Head of UK equities David Cumming refused to comment.
Investment group Fidelity also disposed of much of its Abbey stake last week. Other major shareholders, including Brandes and Franklin have also sold large tranches of their Abbey shares. Others, including the insurer Legal & General, which owns 3% of Abbey, have yet to decide.
Some of these fund management groups see it as a good time to sell Abbey shares, as they are still being buoyed up by the prospect of a counter bid.
It may be wishful thinking, but there’s also a view doing the rounds of the Square Mile that Santander may yet return with a slightly more generous offer with a higher cash element.
But David Ridland, a fund manager at Britannic Asset Management, said: “Given the heroic level of the cost synergies [that Santander has said it can eke out of Abbey] they would struggle to raise the cash element of the bid much above 31p.”
Botín has said he will make around £300m in cost savings through shutting processing centres and improving IT. But Ridland said: “These represent 20% of the cost base and would be heroic for an out-of-market player.”
The other vague hope that has created the premium is that a UK bank may overcome its paranoia of a referral to the Competition Commission and jump in with a rival bid.
Among UK banks, possible counterbidders include the Royal Bank of Scotland, HSBC or Barclays. All three would be able to generate much greater cost savings than Santander, or a rival overseas bidder, because of their ability to “deduplicate” overlapping branch networks and job functions.
But there is a distinct possibility that such a bid would be referred to the Competition Commission and blocked after months of uncertainty — as happened with Lloyds TSB’s bid for Abbey three years ago.
Last week HBOS chief executive James Crosby also talked down speculation that another UK bank would jump in with a higher offer. “[UK banks] will look at the competition analysis and come to the same inevitable conclusion — that there are big difficulties.”
This was echoed by Lloyds TSB chief executive Eric Daniels on Friday. “Local banks are precluded by the Competition Commission. I don’t believe that any of the large local institutions will have a chance of passing a Competition Commission referral.”
No wonder some Abbey shareholders have decided that a bird in the hand is worth two in the bush and cashed in their shares already.
But Botín — whose family’s fortune is estimated by Forbes to be $1.1 billion and was recently voted the third most powerful person in Spain in a poll by Madrid-based newspaper El Mundo — is right to be careful about not wishing to overpay for Abbey.
In most analysts’ books, the mortgage bank, which was founded in 1944 through the merger of two building societies: the Abbey Road Building Society, founded 1874, and the National Building Society, founded 1849, has been considered damaged goods ever since Harley diversified it into areas about which it knew little such as “wholesale” banking.
Botín is widely believed to have overpaid for Brazil’s Banespa in 2000, which remains Santander’s biggest foreign acquisition to date.
At the height of the dotcom boom, Botín bought Patagon, an online broker in Argentina, for $530m. He sold the outfit for $10m two years later.
DYNASTIC BANKER
EMILIO BOTIN: MINI PROFILE
Emilio Botín is the son, grandson and great grandson of bankers. But his forefathers would barely recognise the institution that they founded in 1857 with one branch and 13 employees.
Under Botín’s stewardship, Banco Santander has become the largest bank in Spain, swallowing up competitors, shattering the gentlemen’s agreements that once governed Spanish banking, injecting competition and leading the modernisation of the industry.
Emilio Botin, 69, read law and economics at Deusto, a Jesuit university in Bilbao. He joined Banco Santander at the age of 24 and worked his way up the ranks in a business dominated by his father “Don” Emilio Botín.
Botín junior took control of the bank in 1986 and three years later triggered a banking revolution when he set up high yield accounts, doubling customer numbers in one year.
In 1994, Santander snapped up rival bank Banesto and doubled its branch numbers to nearly 4,000. Botín has also acquired banks in Argentina, Chile, Peru, Colombia, Brazil, Venezuela, Mexico, Puerto Rico and Uruguay. His aim: to generate half the bank’s profits abroad.
Botín is austerely frugal in his own lifestyle, rising at six, subscribing to the healthy Mediterranean diet, but also has a passion for art and sport. One of his daughters, Carmen Botín O’Shea is married to Spanish champion golfer Severiano Ballesteros. He is a follower of Barcelona Football Club.
Emilion Botín’s wife, Paloma O’Shea, is the founder of a respected music college. They have six children. His daughter, Ana Patricia, who has held several top posts at Santander, with mixed success, was once seen as heir apparent.
Santander’s board has voted to end the mandatory retirement age of 72 for the bank’s directors.
This article was published in the Sunday Herald on 1 August 2004