Narrow-moat Santander (SAN) announced the acquisition of the struggling Banco Popular for the notional amount of EUR 1 after the ECB deemed Popular to be “failing or likely to fail” and regulators put the bank up for auction. As part of the transaction, Santander intends to complete a rights issue in the amount of EUR 7 billion to fund provisions for the large pool of toxic real estate assets (EUR 37 billion) that led to Popular’s downfall. We believe this deal will create shareholder value in the long run, as the acquisition strengthens Santander's core market exposure in Spain. We intend to incorporate the rights issue and consolidation of Popular into our model, and would anticipate a fair value increase around 5%-10%.
Santander has a long track record of acquisition-fueled growth expanding globally and diversifying the business. However, the acquisition of Popular is the result of an opportunistic move by Santander’s management picking up a strong franchise hurt by toxic real estate exposure, rather than a continuation of previous management’s acquisition streak. Overall, we welcome this decision and view the deal as strategically sound. Post-acquisition, Santander will be the largest Spanish bank by lending and deposits, while Santander’s market share in the attractive Spanish SME lending market will increase to 25% from 11%. Improving economic conditions in Spain benefiting SME lending and Santander's experience in managing real estate loan losses will allow Santander to unlock Popular's value. We are equally satisfied with the decision to raise EUR 7 billion in a rights issue in one swoop, which will bring the post-acquisition capital and provisions in line with the rest of the group rather than just plugging Popular’s balance sheet hole of roughly EUR 3 billion-EUR 4 billion.
Santander expects to achieve EUR 500 million in annual cost synergies by 2020 generating a return on investment of 13-14%, which is above the cost of equity of 11% we assign Santander.
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