Santander eyes Sovereign in hunt for bargains

MADRID (Reuters) - Spain's SANTANDER (SAN.MC)said it was in talks to acquire Sovereign Bancorp Inc on Monday, as the euro zone's largest bank hunted for bargains in a sector that has been hit by the global financial crisis.

On Monday, a source familiar with the matter said Santander was expected to pay $3.81 a share for the stake in the U.S. bank it did not already hold, Sovereign's closing price on Friday, or a total of around $1.9 billion.

In 2006, Santander paid around $3.3 billion for a 24.9 percent of Sovereign, making the Spanish bank its largest shareholder.

In an investors note Renta 4 said: "This is a very attractive price and...is strategically positive because it will allow Santander to strengthen its position in the United States and apply it business model to a company it knows."

Under an original agreement, Santander could not make a bid for the remaining stake it did not already own in Sovereign at market value until June 2009, though the rumored price suggested Sovereign had brokered the takeover talks.

RISK CONCERNS

Like most U.S. banks, Sovereign has been hit by toxic debts emerging from the country's subprime crisis and in the second quarter reported a 14 percent drop in net profit to $127.4 million.

To shore up capital, Sovereign in May raised $1.9 billion, and has eliminated its dividend for this year.

A buy-out would raise concerns over the Spanish group's aggressive acquisition policy which this year has sucked up British bank Bradford & Bingley's deposits and branch network and Alliance & Leicester plc.

Santander is also growing in Brazil after the acquisition of Banco Real last year.

Tiago Dionisio, a banking analyst at Espirito Santo, said: "A buy out of Sovereign means an even greater diversification for Santander...and the delicate situation of the U.S. group could mean Santander has to make greater cash injections."

The U.S. government's $700 billion bail out package for the country's struggling financial institutions could mean that Santander's executives believe that the worst of the dangers facing Sovereign have passed.

Caja Madrid analyst Javier Bernat said: "There's always a risk to an acquisition such as this, but thanks to a clean-out in the United States, it's less than it might have been.

"Santander has been studying this operation and has been looking through Sovereign's books for a long time. This is an opportunity, especially considering the price."

Santander must also decide if the risk of acquiring the U.S. group is greater than that of allowing Sovereign, in which it has already invested enormous sums, to fail completely.

The Spanish bank wrote off 737 million euros ($1.01 billion) on its investment in February and at current prices is facing latent capital losses of 2 billion euros.

Sovereign became the largest U.S. savings and loan last month when JPMorgan Chase & Co bought the banking operations of Washington Mutual Inc, then the largest thrift.

(Reporting by Paul Day; Additional reporting by Judith Macinnes and Jesus Aguado; Editing by Sharon Lindores)