The Edge

Richard Northedge takes on corporate finance

Banco Santander escapes from a bad Scottish deal

Tag: Banco Santander, S.A. (ADR) (NYSE:SAN)

No wonder Santander has pulled out of buying 316 Royal Bank of Scotland branches. It was vastly overpaying and the Spanish bank’s troubles at home mean it cannot afford such mistakes.

The European Union ordered RBS to sell as punishment for its government rescue – even though it is the customers who suffer by being forced to swap the safety of a state-owned bank for the insecurity of a foreign institution they didn’t choose. Lloyds is being forced to sell 632 branches for the same reason.

But once Santander saw the terms Co-op agreed for the Lloyds branches in July it realised its error in offering RBS £1.65bn in 2010.

The Co-op is paying just £350m plus an IOU for £400m to purchase twice as many branches as RBS is selling. It gains 4.8m retail customers, not the 1.8m that Santander would have acquired, and more business clients. So Co-op has bought branches for little more than £1m each when the Spanish bank had offered £5m.

Santander scraped through its European stress tests but buying the RBS branches would have strained its balance sheet. Lloyds had to halve its price to sell: Santander might have had to write-off half its outlay after buying.

The Co-op purchase looks so good because the EU divestment order bars a sale to another big bank. With the large players excluded, there were Lloyds found few bidders. It not only had to halve its price and then defer half the remaining sum, it lent Co-op the cash to buy.

It is hard to see how Santander was allowed to bid for the RBS branches anyway, when other giants were excluded. The Spanish bank already owns Abbey National, saved Alliance & Leicester from collapse and purchased Bradford & Bingley after it crumbled. It thus has 25m UK customers, 33 business centres and 1,300 branches – about one-eight of the whole UK network. Adding RBS’s cast-off would merely make a big bank bigger.

But if the Scots bank has to start again, who will buy this time? Not Co-op, which, in trebling its size through the Lloyds acquisition, already risks biting off more than it can chew. The price next time may be an even greater giveaway than Lloyds’ terms.

Virgin Money bought 75 Northern Rock branches for almost £1bn - £13m each. Offering, say, £800m to add 316 RBS branches could average down that cost and provide synergistic benefits.  But if the EU really wants to strengthen the UK banking system it would scrap its demand for a sale and allow RBS’s customers to stay with the bank they want and taxpayers to reap the rewards. It might not even be too late to undo the Co-op deal.

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