Sovereign shareholders to boost investment

May 13, 2008 5:59:55 AM PDT
Sovereign Bancorp Inc. has a plan to try and avoid a financial freefall.

The nation's third-largest savings and loan, said Monday that its two biggest shareholders are planning to boost their investment in the company as it seeks to raise $1.5 billion to hedge against an economic slowdown.

Once at loggerheads over control of the Philadelphia thrift, Spain's Banco Santander S.A. and Relational Investors LLC, of San Diego, plan to participate in Sovereign's $1.2 billion common stock offering, according to a Securities and Exchange Commission filing. Sovereign also plans to issue $500 million of subordinated debt.

Madrid-based Santander, which own 24.9 percent of Sovereign, and Relational, which owns 6.3 percent, did not disclose how much they plan to invest.

Santander is expected to buy up enough shares to keep its ownership stake steady, since a stock offering would dilute holdings. If its ownership stake went above 24.9 percent, Sovereign would need shareholder approval.

Shares of Sovereign rose 32 cents, or 4.1 percent, to $8.18.

"It certainly brings much needed capital," said Rick Weiss, an analyst at Janney Montgomery Scott. "They're still well-capitalized, but it's thin. If the economy does tank ... $1 billion in capital can go a long way."

Weiss said Santander's move also means that the Spanish banking giant won't be buying the rest of Sovereign in the short run: "This kind of allows them to keep their options open for now."

The housing market has taken a heavy toll on the banking industry. While not directly affected by subprime mortgages, Sovereign has seen loan defaults rise. It has stopped issuing auto loans in states where defaults mounted and suspended the company dividend.

Sovereign, the parent of Sovereign Bank, said late Monday that it will offer 156.3 million shares of common stock for $8 per share. The offering is worth about $1.2 billion.

Lehman Brothers Holdings Inc., the sale's underwriter, has a 30-day option to buy another 23.4 million shares.

The offering is expected to close Friday.