Facing mounting pressure from an activist shareholder, Sovereign Bancorp Inc. spent the weekend in late-stage talks that culminated Monday with a deal to sell a significant equity stake to Banco Santander Central Hispano SA.
Details of the proposed transaction were emerging just before press time. Banco Santander, of Madrid, would pay $2.4 billion for a 19.8% stake, with an option to buy 5% after July 2006 and 100% after two years. Sovereign, in turn, announced a deal to acquire Independence Community Bank Corp. in New York for $3.6 billion.
Executives at the $63 billion-asset Sovereign and at the $18 billion-asset Independence declined to discuss the negotiations. Santander confirmed Monday that it was in talks with Sovereign, and later that day it disclosed the terms of both its deal and the one for Independence.
The three-way transaction could solve problems for both Sovereign and Independence. An acquisition would conclude what has been a difficult period for Independence, which has been hampered by the flat yield curve and has faced intense competition in its core business of multi-unit housing lending.
The deal would also give Sovereign an important ally in its ongoing spat with Relational Investors LLC. The San Diego asset management firm, currently Sovereign's largest shareholder, with a roughly 7% stake, has been pressing to gain seats on its board.
"Clearly, this is an effort to thwart the efforts of Relational as part of their proxy material; it was a defensive measure," said Matthew Kelley, an analyst at Moors & Cabot Inc.
Relational Investors' options "would be much more limited if someone takes a 20% stake in the company," Mr. Kelley said. "Undoubtedly, this is bad news for the folks at Relational."
Santander's position would be "detrimental to Relational's effort to get board representation," he said.
Last week Relational Investors said it had hired a turnaround specialist, Anthony P. Terracciano, who has held top positions at several high-profile banking companies, including Riggs National Corp., which PNC Financial Services Group Inc. bought in May. Mr. Terracciano was also the chairman and chief executive of First Fidelity Bancorp, which First Union Corp. (now Wachovia Corp.) bought in 1996.
Mr. Terracciano and Banco Santander have crossed paths before. The Spanish company owned a third of First Fidelity's stock during Mr. Terracciano's tenure and became First Union's largest shareholder after the First Fidelity sale. (A year later Banco Santander sold the stake.)
Banco Santander also owns 89% of Santander BanCorp, the San Juan, Puerto Rico, holding company for Banco Santander Puerto Rico. Mr. Terracciano's office said he was not available for comment Monday.
Not everyone on Wall Street was certain the deal would put Sovereign back in investors' good graces.
"Investors will be upset with the fact that they could turn right to another M&A deal," Ken Usdin, an analyst at Banc of America Securities LLC, wrote in a note published Monday morning.
"Investors want Sovereign to work on improving fundamental performance without undertaking transaction risk and taking the eye off the ball on the core operations of the business."
Kevin Timmons, an analyst at CL King & Associates, said, "Relational and any other investors who are in the general thinking mode that Relational is in would come away from … the speculation as being unhelpful in terms of how they would like to see the company go. I don't think Relational is looking for the company to be doing acquisitions at this point. They want to see the company perform at a higher level," and acquisitions would take away from that effort.
A spokeswoman for Relational Investors said Monday that it was waiting for more specific information on the deal with Banco Santander to be released before commenting.
Banco Santander's interest in Sovereign could also put the Philadelphia company in a firmer competitive position. Some of its main competitors have allied with or are owned by deep-pocketed foreign parents. Citizens Financial Group Inc. of Providence, R.I., is a subsidiary of Royal Bank of Scotland PLC, and in March, Toronto-Dominion Bank bought a 51% stake in Banknorth Group Inc., now TD Banknorth Inc.
Sovereign tipped its hand on the Santander deal this summer, when it said it had long included three options for growth - organic growth, a merger of equals, or acquisitions - in its strategic thinking. During a second-quarter earnings call in July, chief executive Jay Sidhu said that he would consider a partnership with a foreign company.
"Does it make sense to partner with someone who is overseas and wants to proceed with some kind of growth, and that is obvious for banks in our position? There is a tremendous amount of attractiveness," he said.
Analysts said that the sale of Independence would be positively viewed by investors and perhaps facilitate more mergers and acquisitions in the New York market.
If that deal goes through, Independence's "management team will have done a home run, considering the challenges in earnings environment," Mr. Kelley said. "Clearly, it would bode well for other names in the space. The whole New York thrift space is certainly going to get a bounce on this news."
Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners LP, said that even though Independence had begun to restructure its business, "it will be hard for the company in the short run, going it alone, to show impressive financial metrics." Because of that, "timing is right for them to sell."
