Santander offers $2.9 billion to take control of Mexico business

SANTANDER/MADRID (Reuters) – Santander on Friday made an offer to take full control of its business in Mexico via a deal worth 2.6 billion euros ($2.93 billion) to take advantage of higher returns available from Latin America.

The proposed deal, which will unwind Santander’s listing of 25 percent of the bank on the Mexican stock exchange in 2012, shows how the Spanish bank aims to focus more on emerging economies while cutting costs in mature markets in Europe.

Banks in Europe are cutting back to offset a squeeze on margins from record-low interest rates in the euro zone. In Mexico, benchmark interest rates are currently at 8.25 percent, the highest since the financial crisis.

The Mexico deal will also bring Santander head to head with Spain’s second-largest bank BBVA, which makes about 40 percent of its earnings from Mexico.

Mexico, which accounted for 8 percent of Santander’s earnings last year, is a highly profitable market where the bank has set a mid-term target of 19-21 percent for the underlying return on tangible equity ratio.

Santander’s chief financial officer Jose Antonio Garcia told analysts the bank was confident about Mexico’s long-term prospects. “We see this as an opportunity to increase our exposure to Mexico.”

Analysts at Spanish investment firm Alantra welcomed the deal from a “strategic and financial point of view.” But the analysts also said in their research note that the timing could be an issue due to a recent slowdown in Mexico’s economic growth.

Mexico’s economy grew less than first estimated in the fourth quarter as activity contracted in December, the first month of President Andres Manuel Lopez Obrador’s administration, clouding the outlook for 2019.

But the Mexican President said last week that the country’s economy would grow at least 2 percent this year, projecting a larger expansion than a government estimate issued just a day earlier.

Santander’s shares were down 0.8 percent at 0710 GMT, undeperforming the Spanish stock market.

Santander, which currently holds around 75 percent of its Mexican business, said it would issue up to 572 million new shares, equivalent to up 3.5 pct of Santander’s market capitalization, to finance the voluntary offer.

The new issuance is worth 2.6 billion euros based on Thursday’s close, according to Refinitiv data.

The euro zone’s biggest lender in terms of market value, will offer 0.337 shares for 1 share of Santander Mexico and 1.685 shares per share to holders of Santander Mexico ADS.

Santander said the exchange ratio represented a 14 percent premium based on the closing market prices of Banco Santander and Santander Mexico shares on April 11 2019.

The exchange ratio takes into account both the Santander Mexico dividend on 2018 results, expected to be approved by Santander Mexico at its annual general meeting on 29 April 2019, and Banco Santander’s dividend on 2018 results due to be paid in early May 2019.

Santander expects the transaction to have a return on investment of approximately 14.5 percent, to be neutral on earnings per share, and to contribute positively to the group’s core Tier-1 capital ratio.

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