Ian Fraser, Financial Editor, and Darran Gardner report on the man and company that may be backing RBS’s bid for NatWest
The next three weeks are going to be vital for the future of Scotland’s major banks. With the Bank of Scotland bidding for the National Westminster Bank (NatWest), there is a growing belief that the Royal Bank is now likely to enter the fray by December 3.
One thing is certain: they cannot both be winners. And the loser in any such high-powered poker game could end up prey themselves. It is an option that is being weighed up at the Royal Bank of Scotland, whose partner is the massive Banco Santander.
Why has Sir George Mathewson, chief executive of the Royal Bank of Scotland, taken so long to show his hand about entering the fray for the NatWest? Some observers are wondering it has something to do with his close business relationship with Emilio Botin, the Godfather of Spanish banking?
Maybe the Royal’s chief executive is concerned that some outstanding Spanish matters relating to insider dealing and money laundering might not go down well with the Financial Services Authority which supervises UK banking?
Botin, one of the richest men in Spain and father-in-law of golfer Severiano Ballesteros, is expected to play a critical role in the Royal’s proposed £26 billion counter-bid for NatWest, which City sources predict will be made on December 3, the day after the Edinburgh-based institution posts its financial results.
But as the Royal and Botin’s Banco Santander edge towards finalising what they hope will be a knock-out bid for NatWest, the risks involved in this Hispano-Caledonian alliance may become clearer. Indeed, some argue that the participation of BSCH and Botin might even has the perverse effect of limiting the Royal’s chances of success.
Amid speculation that Botin is increasingly keen to become a central player in British banking, elements of his company’s past may leave some thinking that the Royal has a relationship potentially as toxic that which Bank of Scotland had with US televangelist Pat Robertson.
In the insular world of British banking, Botin is relatively unknown. In Spain, he is revered as a financial and business hero with an excellent nose for a deal, who through a series of canny acquisitions and mergers has transformed Banco Santander from a marginal presence into Spain’s largest bank.
The bank has had a cross-shareholding and strategic alliance with Royal Bank of Scotland since 1988. It began started as a cross-shareholding inaugurated under former Royal Bank of Scotland chief executive Charlie Winter. In April this year, it united with Banco Central Hispanoamericano to create the renamed BSCH, now the largest bank in southern Europe and the eurozone’s eighth biggest bank by assets.
Nevertheless, financial sources suggest Botin may be too mercurial to be granted a place at the top table of UK and European banking. “At heart he is a wheeler-dealer. Arguably this is not a culture that sits comfortably with the Anglo-Saxon banking model,” said one senior industry source.
For some, BSCH’s dealings are a far cry from this model. Several foreign ventures by Banco Santander have revealed the darker side of Spanish banking practices, with one particular investigation by US government undercover operatives exposing the laundering of drug money by Santander employees.
This sting, part of a large 1996 investigation into Mexican bank corruption, saw Santander employees agree to launder drug proceeds. The conviction of two staff saw the bank accused by the New York State Banking Department of failing to conduct its operations in a “safe and sound manner”. A temporary cease and desist order, which a department spokesman said remained in place, was issued to the bank, which promised to start an internal investigation.
Prior to this, there have been rumours that, in 1991, US regulators were concerned when Banco Santander started to build a stake in America’s First Fidelity Bancorporation. After First Fidelity merged with banking giant First Union in 1995, Botin surprisingly sold all of Santander’s shareholding in First Fidelity for $2.5 billion, despite claiming that he had “complete confidence” in First Union management.
Other allegations come from a Scottish bank official who said he was shocked to discover that “autocarteras” — an insider-dealing practice by which quoted Spanish companies prop up their own share prices (which is legal in Spain but outlawed in the UK) — was carried out within the Santander group.
The Spanish giant has also been engaged in a heated takeover battle to acquire a clutch of financial institutions owned by the Portuguese billionaire Antonio Champalimaud. This tie-up, initially blocked by Portuguese regulators, has since been approved in modified form by the European Commission.
Despite protests from Portugal’s largest bank, last Thursday the country’s finance minister brokered a deal where Banco Santander will acquire Champalimaud’s 52% stake in the financial group. If further regulatory hurdles are jumped, the complex deal would make Santander Portugal’s fourth-largest bank.
Santander already enjoys a series of alliances, minority stakes and cross-shareholdings with various continental banks, including France’s Societe Generale, Germany’s Commerzbank and Italy’s San Paolo-IMI.
Duncan Farr, a banks analyst at Morgan Stanley Dean Witter, said: “It’s a wait and see game. The thinking is if you don’t buy a ticket – in the shape of a minority stake in an overseas institution — you won’t get the prize. That’s why BSCH has taken so many strategic stakes.”
Now, sources believe that Santander is beginning to regard its Royal Bank of Scotland ticket as its passport to European greatness —although it is unlikely to accumulate more than a 29% stake in the combined institution. “From Botin’s perspective, it’s only a matter of time before the UK joins the eurozone,” says Inigo Lecubarri, European banks analyst at Salomon Smith Barney.
“Botin really is a long-term partner and he and Mathewson understand each other very well. He will definitely support anything that Mathewson chooses to do. In my view he would like RBS to give it a shot. RBS could probably go it alone but, if it wants financial support, Santander has very deep pockets.”
Lecubarri adds that the Spanish bank has unrealised capital gains which are worth €7 billion, of which €4 billion could easily be released. It also has €6 billion of excess capital. “This means BSCH have about €10 billion to spend,” says Lecubarri.
Santander will back Royal Bank of Scotland over NatWest
Last month a source at Banco Santander, of which Botin is chairman, told the Sunday Herald: “Royal Bank is one of our strategic partners. Anything that its management proposes will have our full support.”
Since then, the Scottish and Spanish banks are understood to have been locked in talks with their advisers, investment banks Goldman Sachs and Merrill Lynch, about how to structure their bid.
“I wouldn’t be surprised if Sir George and Emilio Botin are working hand in glove on this take-over,” said one financial source. “Institutional investors, many of which will have sizeable holdings in both Bank of Scotland and NatWest, may find the BoS offer unattractive, since it will leave them overexposed to the new entity. If an RBS/Santander bid is forthcoming, it is expected to contain a cash alternative, which could make it much more attractive.”
Although analysts estimate that RBS could offer as much as £20 per NatWest share without risking dilution to existing shareholders, they believe its initial offer will be in the region of £16 per share.
For Emilio Botin ‘banking is everything’
Emilio Botin comes from an established Basque banking family. His grandfather, Juan, chaired the bank which was founded in 1857 to finance transatlantic trade flowing through the northern Spanish port of Santander.
Emilio’s father “Don” Emilio only relinquished control in 1986 when he reached the age of 84. The Don allegedly only retired to avoid having to disclose his personal shareholdings in the bank to US authorities when the bank sought a listing in the New York stock exchange.
To this day, the true size of the family’s stake in Banco Santander remains a mystery. Before its merger with Banco Central Hispanoamericano, Botin admitted that he and other family members held 6% of Banco Santander’s equity. But according to its 1997 annual report the family owned more than 11%
Botin studied law and economics at Valladolid and the Jesuit university at Bilbao. He joined the family firm at 24 and became a director at 26. Now aged 65, he is renowned for hard work and an intense love of banking. He is determined to live his life according to his father’s motto: “banking is everything”.
He sits alone on the vast top floor of his bank’s Madrid headquarters, and his habit of working on Sundays can prove irksome to his staff.
“He’s a workaholic. On Sunday evenings he often calls everybody at the bank,” says Lecubarri. “He pays his employees above average salaries, but he demands a lot in terms of their time. He often calls his entire top management team to meetings on Sunday evenings.”
Married to concert pianist Paloma O’Shea, he has six children, one of whom is married to the golfer Severiano Ballesteros, another famous Cantabrian.
Botin prefers to live in his native Santander, and only bought a flat in Madrid in the early 1990s. His summer house, near Santander, has its own private runway, enabling him to come and go as he pleases by executive jet. His acolytes maintain there is no danger of raised eyebrows at the Financial Services Authority (which assumed responsibility for banking supervision from the Bank of England in June 1998) should the mooted NatWest bid go ahead.
In February this year, to attain his merger with BCH, Botin effectively sacrificed his own daughter’s career. Ana Patricia Botin, 38, was supposed to have been heading up global investment banking in the new bank and was widely seen as Emilio’s anointed heir.
However, Angel Corcostegui, chief executive of the merged BSCH, was enraged when an eight-page profile of her appeared in the newspaper El Pais, describing Ana Patricia as “the most powerful woman in Spain”. He viewed it as an affront to the new bank’s promise to shareholders to run the organisation along professional and decentralised lines.
Sources suggest that he came close to aborting the merger on the issue. Soon afterwards, Ana Patricia announced she had “relinquished all executive responsibilities in the group”, while retaining a seat on the board. Her future in the group remains uncertain.
According to Keith Baird, European banks analyst at Enskilda Securities, Botin has repeatedly shown a clear understanding of his priorities: “In terms of delivering value to shareholders, Emilio Botin is doing very well. His own stake in the bank gives him a double interest in ensuring its success.”
This article, bylined Ian Fraser and Darran Gardner was published in the Sunday Herald on 14 November 1999