Santander considered paying up to €1.6bn for Banco Popular in the weeks before its smaller Spanish rival collapsed but held off on making a formal offer because it believed shareholders would reject the approach, according to a series of internal presentations made to its board seen by IFR.
The lender concluded that a purchase would make strategic sense, catapulting it ahead of rivals BBVA and La Caixa in the domestic banking market with a 20% share, adding important small and medium-sized business clients and boosting its presence in important regions where Santander punches below its weight.
It ultimately bought Popular for just €1 on June 7 2017, hours after the European Central Bank said the bank was “failing or likely to fail” - a decision that cut Popular off from emergency liquidity support and kick-started a resolution process that would lead to shareholders and some bondholders being wiped out.
But in a presentation to the board on May 3, the Santander bid team had proposed making a €1.6bn offer for Popular. They concluded that, even after a €6.1bn rights issue to clean up the bank, as well as litigation and restructuring costs, such an offer could still deliver an 11% return within three years. The effort to buy Popular was dubbed internally “Project Neptuno”.
The bank decided not to go ahead with a bid, and a second presentation, dated May 8, indicates that there was a change in approach from Santander - and a complete change in methodology. Whereas the earlier report adopted a bottom-up process to come up with the €1.6bn valuation, after May 3 the analyses focus on justifying a fixed €200m price for Popular.
CHANGE IN METHODOLOGY
It is unclear why Santander ditched its initial methodology, or how it arrived at the €200m price tag, one-eighth of the valuation it had placed on the bank just five days earlier. The proposed bid translated as just five cents a share, well below the 70 cents where the shares were trading in the market at that point.
“Even with high levels of cleaning and litigation, there is value in a transaction at a price close to zero,” the bid team wrote, conceding, however, that such a low bid would be successful only in a “scenario consistent with an intervention by the supervisor”. That was a month before the bank’s resolution.
The internal deliberations at Santander took place against the backdrop of a formal sales process set up by Popular chief executive Emilio Saracho, who took over the troubled bank less than four months earlier. Santander, BBVA, Bankia and Sabadell all took part, with formal offers due by May 16.
On the eve of the deadline, after a week of access to Popular’s books as part of the bid process, Santander upped its estimates of Popular’s capital needs to €8.6bn from a previous base case of €7.5bn. Nonetheless, it concluded a €200m bid would still generate a 12.8% return for the bank by 2020.
REAL ESTATE TALKS
With none of the four Spanish banks involved in the formal sale process willing to make a bid, Santander continued work. At the same time, its real estate team began to examine how the bank might deal with Popular’s €30bn of bad real estate assets if an acquisition were to come to fruition.
In an internal report dated May 21, that team confirmed that it had held conversations with Blackstone and Lone Star about the possibility of them buying the bad assets. Both were “very interested”, and exchanged letters of intent with Santander. (Blackstone is a major investor in Refinitiv, the owner of IFR.)
“We believe [the Banco Popular] transaction is attractive given limited competition and it could be priced at opportunistic levels representing a good opportunity to invest at the right point in time in a recovering Spanish real estate market,” Santander’s real estate team concluded in an internal report.
“To be able to quickly reduce the exposure to this portfolio, partnering with these type of investors is critical (vs an orderly wind down alternative) and, in order for these investors to be interested, opportunistic prices (in line with underwriting proposal) are key,” the report added.
Blackstone eventually bought half the Popular bad assets in a deal that was finalised two months after the resolution of the bank. The deal with the private equity behemoth valued the assets at just one-third of their face value. Santander retains a 49% stake in the spun-off asset portfolio.
SUDDEN CHANGE IN VALUATION
The conversations with Blackstone and Lone Star, and the stated need to obtain Popular assets at “opportunistic prices”, came ahead of another sudden change in Santander’s valuation of Popular. On May 22, the amount the bid team would consider offering was revised after factoring in an additional €2.7bn of writedowns to Popular’s real estate assets.
It is unclear why additional writedowns were considered necessary, not least because Santander had already concluded the examination of Popular’s books when it came up with its €200m bid price on May 15. After the revision, the bid team lowered its recommended bid price to “zero”, and only after junior bondholders were bailed in.
As a result, the bid team recommended to the board that a bid happen only in the context of a resolution process and only after €2bn of Additional Tier 1 and Tier 2 bondholders were bailed in.
The initial change in methodology, and sudden increase in provisions, has left some asking questions.
“Banco Popular was a solvent bank, and while it had problems they were problems of liquidity,” said a lawyer who is preparing a case against Santander for a shareholder, and who asked not to be named. “Santander offered a price which was far from the true value of the bank.”
DEPOSITS STAY STABLE
All of these deliberations took place while deposits at Popular remained relatively stable. A Bank of Spain report shows that, on May 22, deposits stood at just over €70bn, more or less the same as where they were a month earlier. Deposit outflows only really began on May 23.
That followed an interview by Single Resolution Board chair Elke Koenig during which she said that the resolution body was closely monitoring the situation at Banco Popular. Many involved with the bank blame the Koenig interview as the starting point for a run on Popular.
Santander did not respond to repeated requests for comment.