As it sent out information packs to shareholders ahead of next month’s vote on Santander’s £1.3bn offer, Alliance & Leicester warned that there could be dire consequences if the deal falls through. Acting chairman Roy Brown said the bank could be exposed to ‘significant external risks’ if shareholders voted against the deal (which has the unanimous support of the board).
Brown reckons that there’s no sign of the economy picking up any time soon, so it’s important for A&L to find a deep-pocketed backer. ‘The Board sees no obvious circumstances that are likely, materially, to improve conditions in the financial markets or the broader economic outlook in the near to medium term,’ he said ominously.
Given that A&L’s profits plummeted by more than 99% in the first six months of the year, with more credit crunch shocks still to come, it’s no wonder the board is worried. And the offer does look pretty generous on paper: investors will get one Santander share for every three A&L shares they own, plus a dividend of 18p per share – a 53% premium to the previous share price.
More importantly, Santander’s backing – and the eventual integration with its existing subsidiary Abbey – should provide A&L with the safe harbour it needs to deal with the fall-out from the sub-prime crisis and the ongoing problems in the UK housing market. The theory is that the greater scale of the combined business (which will have 959 UK branches) will allow it to compete more effectively. Plus Santander has promised to provide up to £1bn in cash to cover any future losses.
There’s also another compelling reason for the A&L bosses to support the Santander bid: they’re set to receive a hefty bonus simply for staying put. According to the bid document, directors will pocket a retention bonus of up to 125% of salary if they’re still in their jobs in December next year. For CEO David Bennett, that could mean a windfall af about £750,000. No wonder he’s keen.
The question now is whether a 75% majority of shareholders will back the bid at (or before) the EGM on September 16th. Unlike the directors, they have no guarantee that they’ll be better off in 15 months' time...