Investors wary of Latin lover

Abbey National's decision to recommend an £8 billion bid from Spanish banking group BSCH (Banco Santander Central Hispano) has gone down like a lead balloon with many British investors. 'There is something that doesn't feel right about this, it's a bit too cosy,' said one British institution.

Shareholders in BSCH are not entirely over the moon either - the Spanish bank's stock price has tumbled by 10 per cent, which has reduced the value of its all-shares offer by about £500m.

It's not so much that the City remembers the offer from Lloyds TSB in 2001, valuing Abbey at £20bn: let's face it, those were different days before the dramatic stock market crash that accompanied 9/11. What really bothers some shareholders is how the Abbey board rebuffed National Australia Bank and Bank of Ireland in 2002: under their proposals, the UK mortgage bank was valued at more than £10bn - 25 per cent more than the Spanish are offering.

Said one pension fund manager: 'Abbey's management have rolled over far too quickly on this one - they are only half way through their turnaround programme, and here they are recommending a bid that is inferior to what the Australians and Irish were prepared to offer.'

Luqman Arnold, Abbey's chief executive, was not around at the time of those bids, so he can hardly take the blame for missing an opportunity. But he disagrees that the company is selling share holders short. He said: 'If you accept what many analysts say, which is that without a bid our shares would be worth about 420p, then you must conclude that the Spanish are being very generous. The offer represents a premium of around 30 per cent.'Arnold, a former investment banker at UBS, added that it would take some years 'to get Abbey's share price to the level which the Spanish are offering today'.

And yet British shareholders are not convinced. Few are keen to hold shares in a continental institution, and some fund managers face limits on how much of their portfolio can be tilted towards Europe. Big British shareholders sold large chunks of their holdings last week, with Standard Life leading the charge.

Said one stockholder: 'It all seems rushed, and when you hear that Stephen Hester [chief operating officer] is anyway moving to take the chief executive's job at British Land, you wonder if that had something to do with the speed with which everything is being done. A management hole like that during the turnaround programme wouldn't have gone down well.'

Another said: 'Perhaps management do not have sufficient faith in their own programme to see it through. If that's right, selling now may make sense, and they can collect their stock options along the way. "Job done" sort of thing.'

Peter Birch, boss of Abbey when it floated on the stock market in 1989, said: 'I really think that it's a great shame that the company is being sold. I can't say it makes me feel good, not a bit. But it's not for me to comment on the management.'

Although Abbey sources say that they have got their biggest shareholders on board, several indicated that they might not vote for the deal at the Abbey special shareholder meeting in October. Others have not made up their minds. If BSCH and Abbey's shares fall further - reducing the value of the Spanish offer - the more likely it is that British investors will seek to block the deal.

They may be backed by Abbey's army of small shareholders, 1.7 million in total, who speak for more than 30 per cent of the equity.

Supposing the value of the Spanish offer falls to a point at which Abbey's shares are worth just 500p. If that happened, counter bids are almost certain. In fact, the nearer we get to the autumn, the more likely it is that they will show their hand. 'There is no need for rivals to emerge at the moment. It's best for them to sit it out through the summer and hope the shares fall further. Then they can come in with a rival offer that makes more sense,' said a banking analyst. Of course, there is no guarantee of a counter-offer. And one of the Square Mile's leading banking experts reckons BSCH will succeed. 'Why not? They are offering a big premium for Abbey's assets.'

As for a counter-bid, he reckons that the British banks will be reluctant to brave a lengthy Competition Commission inquiry so soon after the regulatory authorities blocked Lloyds TSB from bidding just three years ago. Lloyds boss Eric Daniels said as much on Friday.

That leaves the extremely wealthy Citigroup of the US, which in the past has hinted that it was interested in Abbey. It wouldn't be referred to the Competition Commission. But do the Americans want to get involved in a bidding war with BSCH?

Nor should anyone underestimate the determination of the Spanish. Under ambitious chairman Emilio Botin, BSCH will become one of the leading banks in Europe and one of the world's top 10 following the Abbey merger. And BSCH badly needs to improve the quality of its earnings by increasing its exposure to consumers in the developed world. Currently, about 40 per cent of profits comes from Latin America,.

Nor can anyone blame Botin for spotting a bargain. As Birch says: 'Abbey is a fantastic franchise and has 18 million customers. In recent years, it has lost its way, but it has tremendous potential.'

No doubt, Botin has calculated that the British banks will be lucky to get a counter-bid through the regulator. He knows that the British market is more consolidated than anywhere else in western Europe, so why not chance it?

He is hoping to sway his own investors with promises of cost savings by merging the two banks' technology platforms, and cross-selling savings and mortgage products. If Botin can pull it off, Britain will have a sixth powerful banking group to add to HBOS, RBS, HSBC, Lloyds and Barclays. Good news for consumers, surely?

Santander's shadowy side


In one respect at least, Banco Santander Central Hispano (BSCH) is coming to British corporate life prepared. The Spanish bank is already a veteran of huge rows over executive pay, and its proposed takeover of Abbey may yet give Britain's anti-fat cat brigade much to fulminate about.

Emilio Botin, the bank's high-profile boss, has been accused of mismanagement and of misappropriating the bank's funds in connection with severance deals awarded to two former executives. Jose Maria Amusategui, once co-chairman, retired with €56m in 2001, and Angel Corcostegui was awarded a package worth €108m when he stepped down as chief executive a year later.

Both men had previously worked for Banco Central Hispano, which merged with Santander in 1999. Their massive payoffs generated howls of protest from unions and politicians, and led to Teresa Palacios, an investigating judge, ordering Botin to stand trial (this will probably happen this year).

Botin and the bank strenuously deny wrongdoing, saying the payments were fair and approved by the board, and that neither stock market rules nor the bank's own codes were broken.

This is not Botin's only headache. In another long-running case, BSCH is alleged to have facilitated tax evasion through one of its retirement products in the late Eighties, costing the Spanish exchequer hundreds of millions of euros. The bank strongly denies liability, stressing that the national prosecutor found no wrongdoing. Once again, though, it faces possible charges at the hands of Palacios.

British investors may also be interested to hear of suggestions in Spain that the Botin dynasty, which owns about 3 per cent of BSCH, wields too much power within the company. Recent changes to the bank's regulationsmean that Botin will be able to continue as de facto executive chairman past his 70th birthday. The next generation of banking Botins has been carefully nurtured too: Ana Patricia, his daughter, successfully runs BSCH's Banesto subsidiary.

In fairness, the bank has had a state-of-the-art corporate governance code for several years, largely a creation of Botin himself. Even so, there are occasional embarrassments. BSCH's New York-based bond analysts were rebuked by head office in 2002 when they downgraded Brazilian debt in response to the popularity of Luiz Ignacio Lula da Silva, later Brazil's president. Banespa, BSCH's Brazilian bank, is one of its most valuable assets.
Conal Walsh