Santander to buy A&L for 1.3 billion pounds

"They are acquiring Alliance & Leicester on giveaway terms," said David Cumming, head of UK equities at Standard Life Investments, which has a 2.4 percent A&L stake. "I would be amazed if no one else counters with a higher offer in the next few months," he added.

Santander shares were up 0.4 percent at 11.27 euros (8.9 pounds).

Santander will inject 1 billion pounds of capital into A&L to shield it against more writedowns, bad debts and difficult conditions, and plans to shrink the assets of the combined A&L and Abbey by 20 billion-30 billion pounds over two years.

It expects to reap annual cost savings of 180 million pounds by 2011 and will put A&L on its Partenon IT platform.

Guy de Blonay, fund manager at New Star Asset Management, said Santander is taking advantage of "a very opportunistic situation" to buy cheaply and push through more cost savings.

"In the medium term there is quite a lot of value that could be created for Santander shareholders, but the risk is the Alliance & Leicester mortgage book deteriorates and they are increasing their exposure to the UK mortgage market in a difficult period," said de Blonay, who holds Santander stock.

TOO CHEAP?

Santander held talks with A&L late last year when its share price was more than double its current offer, sources have said.

But the credit crunch has hit all bank valuations, and Santander has the financial firepower to do a deal when many rivals are struggling with their own balance sheets.

A&L Chief Executive David Bennett rejected criticism the offer was too low, but acknowledged the deal had been rushed, with the approach made since last Wednesday.

"We feel it’s a good deal at a fair price. These are turbulent times and when we look forward it’s not clear when that turbulence ends or reduces," Bennett said.

He told reporters A&L’s core tier 1 capital ratio of 6.4 percent at the end of March was adequate and there had been no material changes on capital or writedowns since then.

Unlike several domestic rivals, A&L hasn’t had to raise funds from shareholders, but analysts said it could be vulnerable if markets remained tough.

The merger of A&L with Abbey will give Santander 959 UK branches, a mortgage market share of around 13 percent, and over 8 percent of the savings and personal loan market. A&L said it didn’t expect any competition issues.

Santander said the deal gave it "critical mass" and fits its strategy of having "a high presence in a few markets."

"We’re taking a conservative outlook in terms of needs for provisions and capital and possible damage in a downturn," said Jose Antonio Alvarez, its director general of finance. "We’re aware of the risks, credit risks and liquidity risks."

Abbey was bought for about 8.5 billion pounds in 2004.

British rival Lloyds TSB and France’s Credit Agricole have both shown an interest in A&L in the past, but declined to comment. Entrepreneur Clive Cowdery said he wants to consolidate smaller UK lenders, but his strategy is more likely to buy stakes rather than pursue full takeovers.

Bradford and Bingley shares jumped 10 percent as the move on A&L stoked the prospect of broader consolidation among UK banks after hefty falls in share prices across the sector.

A&L shares had slumped over 75 percent in the past year. Its profits fell 30 percent last year and are forecast to more than halve this year to 195 million, based on a Reuters Estimates average from 15 forecasts, hit by sharply higher funding costs, losses on risky assets and reduced mortgage lending.

Santander’s shares have fallen 19 percent in the last year, outperforming a 46 percent slump by the European bank index.

(Additional reporting by Myles Nelligan in London and Carlos Ruano in Madrid, editing by Will Waterman/Rory Channing)