BREAKINGVIEWS-Santander spins an underappreciated M&A story

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to fix typo in fifth paragraph.

By Liam Proud

LONDON, Feb 3 (Reuters Breakingviews) - Banco Santander SAN.MC initially became $15 billion less valuable after agreeing to pay $12 billion to buy a U.S. regional lender. Swallowing Connecticut-based Webster Financial WBS.N should, however, generate, strong returns. The cross-border deal also beats the alternative of just buying back more stock.

It's the third, and most surprising, step of Executive Chair Ana Botin's recent globetrotting M&A journey, which began last May. Santander offloaded most of its stake in a Polish affiliate to Austria's Erste Group Bank for about $8 billion. A few months later, the Spanish titan scooped up British mortgage specialist TSB for almost $4 billion. Now, Botin has agreed to buy Webster for cash and stock, valuing the target at twice its most recently reported tangible book value.

The reaction was swift and brutal. By mid-afternoon U.S. time on Tuesday, Santander's American Depository Receipts, which are being used to buy Webster, had tumbled by about 8%, wiping out more of the buyer's market capitalization than the cost of the deal.

Botin seems to have blindsided shareholders, who also may be nervously recalling the miserable pre-2008 history of transatlantic banking mergers. Moreover, she has previously talked about focusing on markets where Santander has meaningful scale. In this case, Santander and Webster combined will have $172 billion of deposits, only 8% of the total in the U.S. northeast, let alone the whole country.

Moreover, the 15% return on invested capital that Botin expects from the transaction falls well short of the 20% touted in the TSB deal. It's also below the minimum 20% return on tangible equity that Santander is now targeting for the whole group in 2028. The gap further helps explain the kneejerk skepticism.

It isn't the right comparison, however. The alternative use of capital to M&A would be stock repurchases. At the current share price, they augur a 9% return, according to Santander itself. And the $800 million of promised cost savings from buying Webster are worth some $5.5 billion alone today, after deducting tax and restructuring costs, Breakingviews estimates. The sum easily exceeds the $1.5 billion premium on offer.

Santander has a more logical shape than it did only a year ago. More important British and U.S. businesses should be bigger and higher-returning thanks to M&A, while peripheral assets like Poland are smaller. Once the shock and angst wear off, Botin's wheeling and dealing deserve more appreciation.

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CONTEXT NEWS

Banco Santander said on February 3 that it would buy Webster Financial in a cash and stock deal that values the U.S. regional lender at $75 per share, or $12.2 billion in total.

Webster's shares rose almost 9% to just under $72 as of 2012 GMT while Santander's U.S. depository receipts were down 7.5%.

Under the terms of the agreement, Santander will pay $48.75 a share in cash and 2.0548 of American Depositary Shares for each Webster share.

Centerview Partners, Goldman Sachs and Bank of America are advising Santander while JPMorgan and Piper Sandler are advising Webster.

(Editing by Jeffrey Goldfarb; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))