Sovereign purchase maybe ditched

February 8, 2008 3:34:01 AM PST
Turmoil in the U.S. markets might accomplish what Sovereign Bancorp Inc.'s dissident shareholders couldn't: derail an outright purchase by Spain's largest bank. On Thursday, Banco Santander S.A. all but acknowledged that its investment in the Philadelphia-based thrift hasn't panned out. The Madrid-based bank took a $1.08 billion writedown of its 24.9 percent stake in Sovereign to more accurately reflect the thrift's declining value.

Shares of Sovereign have been cut in half over the past year as investors sold off financial stocks in light of massive losses in the nonprime mortgage market.

The stock had traded as high as $26.70 over the past 52 weeks. On Thursday, shares of Sovereign fell 12 cents to $12.60.

"Given the current uncertainties surrounding the U.S. market and the caution needed in these times, right now we can only consider that we have a contract that expires," Santander Chairman Emilio Botin said at a news conference in Madrid to discuss the bank's earnings.

Santander's involvement in Sovereign goes back to October 2005, when Sovereign announced that it was selling a 19.8 percent stake for $2.4 billion in cash and buying Independence Community Bancorp in Brooklyn, N.Y., for $3.6 billion in cash. Santander also received the right to increase its stake to 24.9 percent, which it later exercised.

Major shareholders fought the deals - one even sued Sovereign - saying the agreement with Santander effectively ceded control of the company to the Spanish bank. They also said Sovereign was overpaying for Independence. The deals closed in June 2006 without a shareholder vote, but months later led to the resignation of Jay Sidhu, Sovereign's longtime chief executive.

Santander has until mid-2011 to exercise an option to buy the rest of Sovereign at any price. From May 2008 to mid-2009, Santander can buy Sovereign at a minimum bid of $40 a share.

In September, Botin had told investors that Santander could buy Sovereign outright, strengthening its foothold in the affluent U.S. northeast market.

"Things change," Botin said Thursday in translated remarks provided by Santander.

Botin's comments make Sovereign's future uncertain. Wall Street had been expecting an eventual acquisition by Santander, Bank of America analyst Ken Usdin said in a research note.

But the downturn in the U.S. credit and mortgage markets have hurt the financial sector. For the fourth quarter, Sovereign Bank reported a 12-fold increase in its net loss to $1.6 billion, or $3.34 per share, compared with the same quarter in the prior year.

The massive loss was mainly due to a $1.58 billion goodwill writedown primarily stemming from the declining value of its purchase of Independence.

On Thursday, Santander reported a 6 percent drop in fourth-quarter profits to 2.49 billion euros ($3.64 billion) from 2.65 billion euros ($3.87 billion) in 2006. American Depositary Receipts of Banco Santander traded on the New York Stock Exchange - which represent ownership of foreign stock - went up by 25 cents to $16.94.