Just when Barclays, the British bank, appeared about to close its merger with Holland’s ABN Amro, three other banks appeared on the battlefield: Santander [of Spain], Royal Bank of Scotland, and Fortis from Belgium launched a counter-offer. The total value of their offer for ABN was 72 billion euros (about $98 billion), of which 70% would be in cash and 30% in shares. This would mean a price of 39 euros per share, or 35% higher than the 35 euros offered by Barclays.


The three banks became fully involved in a battle for ABN after Barclays announced its merger agreement with ABN, which would create the fifth largest bank in world measured by market capitalization. Barclays has offered 3.225 of its own shares for each share of ABN, as well as the right to receive a dividend that is currently expected to be 60 centimes [per share].


The Key: LaSalle

Assuming that the deal winds up being done, analysts believe that it makes strategic sense and customers, for their part, have reason to be happy. “In addition to ABN’s strengths, customers are going to benefit from the profits of whichever new company acquires them,” notes Juan Ignacio Sanz, an expert in finance at the Esade business school in Madrid.


The offer from RBS, Santander and Fortis is based on one condition: ABN must open its books to the consortium as well as cancel its previously announced sale to Bank of America of its subsidiary LaSalle [Bank]. If a better counter offer doesn’t show up before May 6, this deal will go into effect. The three banks want to share the assets of ABN. RBS is especially interested in LaSalle, while Santander wants ABN’s business in Brazil and Italy. Fortis wants ABN’s business in Holland. If LaSalle, a key piece in the puzzle, should disappear, the consortium will no longer make sense.


Bank of America responded harshly to the three banks’ proposal because it created uncertainty about whether giant BOA will ultimately gobble up LaSalle. If ABN should break its agreement, it would have to compensate Bank of America to the tune of 200 million euros.


For Sanz, it makes political sense to create this consortium in order to deal with the risk that the Dutch government will take a protectionist position. “The government of the target company [Holland] is confronting three different governments, and it is very hard to fight against three different governments [at the same time],” says Sanz. The biggest advantage that the three partners have going for them is that they will be able to contribute “more financial muscle in the event that they have to improve their offer.”


Can the consortium cover the cost of its offer? Serious doubts remain. According to the experts, any offer by the consortium would require 50 billion euros in financing. A deal of that sort would require a much higher stream of revenues, and it will have to make economic sense for ABN.


If the consortium’s offer wins over people, ABN will find itself in a predicament because it has just approved the sale of LaSalle, its division in the U.S., to Bank of America. ABN’s agreement with Barclays depends on that transaction going through. It is unclear if ABM could get out of its deal with Bank of America, which has the right to equal any rival offer made for LaSalle during the brief period before the deal closes.


In addition, the RBS-led consortium could be reluctant to outbid Bank of America for LaSalle. That would have the secondary effect of increasing the value of Barclays’ offer (since it would benefit from the higher price paid for LaSalle), and it would still leave Bank of America with the option to equal the offer.


Despite these complexities, ABN’s board of directors has the responsibility to guarantee the highest possible price for its shareholders.


Would it be possible for the consortium to launch a better offer for LaSalle that would depend on the success of the offer the group makes for ABN? Analysts believe that such a deal could provide more synergies for the consortium and might even provide it with more opportunities to cut costs. Santander and its partners have access to a great deal of funding. They would have to be certain that their shareholders are pleased by an agreement whose price continues to rise.


Experts agree that Santander has picked the right partners. “The deal is a good move,” says Sanz. “It’s also a good move to ally yourself with RBS, an old friend, and with Fortis, the Belgian company.” Manuel Romera, technical director of finance at the Instituto de Empresa, agrees. “This is a very good strategy from the perspective of the companies making the offer. Many of the assets of RBS and Fortis are competing with each other; in addition, Santander has been taking advantage of its good relationship with RBS for the past 20 years.”


All sorts of synergies can result, especially the sort that would provide benefits for customers. Meanwhile, the shareholders won’t wind up suffering.


If the deal moves forward, it would be the largest purchase in Santander’s 150-year history, giving it a presence in the Italian market and strengthening its position in Brazil.


Santander’s Standing

Santander is focused on acquiring the assets of ABN in both Brazil (Banco Real) and in Italy (Banca Antonveneta). With its 1,900 offices, Banco Real is the fourth largest financial institution in Brazil, a market that Santander entered in 2000 with its purchase of Banespa, then the fifth largest financial institution in Brazil. Add Banco Real to Banespa, and it makes Santander the third ranked player in Brazil, behind only Banco de Brazil and Itaú. For years, Santander has been flirting with Italy without achieving big results apart from the consumer loan sector. With this deal, Santander would come away with Antonveneta, one of the eight largest financial institutions in the country.


Analysts at Ahorro Corp., the Spanish financial institution, agree that the deal is a “perfect geographical fit” for Santander because Brazil has strong potential for restructuring and because Santander would double its market share in Brazil. The deal would change Santander’s risk profile while increasing Latin America’s contribution to Santander’s overall profits to 45% after the deal, from 37% today.


The big question is figuring out where the group is going to obtain the money it needs to pay for the acquisition. Santander clearly still has a significant sum of assets in the form of shareholdings in industrial firms. Selling off these shares could be accelerated in order to pay for the deal. At the end of 2006, Santander’s holdings in publicly traded companies were valued at about 4 billion euros. One of the leading examples is Cepsa, an energy group in which Santander still owns a 30% share. The problem is that owning 30% of Cepsa does not give Santander control of that company, making those shares less attractive for a possible buyer unless someone pays a premium for them.


Although any sale of assets would also include the bonds Santander owns in the Italian bank San Paolo, it would not be enough to finance the purchase of ABN Amro’s assets. Santander would have to have access to a lot more capital. The big unknown is how much capital it will take. Analysts say that the financial juggling acts will now begin. According to some experts, Santander has solid capital ratios that would permit it to finance part of the purchase with its own resources, in addition to any capital gains from selling off shares.  Expanding the capital base of Santander would pay for the rest. Initially, analysts thought that figure could rise as high as 15 billion euros. However, they now think that the number could wind up below 10 billion euros, or about 12% of the current value of the bank. In terms of market capitalization, Santander is the fourth largest bank in Europe, at 84 billion euros.


Barclays’ Position

Some analysts speculate that Barclays could ask Spain’s BBVA bank to help keep the battle alive because if Barclays loses, BBVA might become the target of some American financial institution.


Dutch authorities have shown reluctance to let ABN be divided into three parts. Such a case would lead to very complicated negotiations between Santander, RBS and Fortis to forge an agreement about how to run each of the parts of ABN. “Unless everything is settled from the outset, a lot of disagreements could surface during the course of the operation,” notes Romera. “We should also not lose sight of the fact that [greater] efficiency implies having to cut some costs and dismiss some personnel.”


On one side, Barclays. On the other, RBS and Fortis. Two high-quality offers. “Both proposals offer very efficient ways to manage products; a clearly defined [strategy for] investment banking; and very strong growth potential,” notes Romera. Place your bets about who will wind up the winner.