Santander offers to buy back the 25% of Santander Brasil they don't own

Communicate: EN

In the press: (ES), (reuters)

To be paid with up to 665mi new Santander shares!
Will increase group earnings in 2015 by €500mi

The no.1 question about the deal in Brazil is : Why issue new shares?

 Is it because:

a) SAN doesn't have the cash to pay for it?

b) SAN has cash but keeps it for better use elsewhere? Where?

c) Future earnings from the additional 25% in Brazilwill offset/ compensate the negative effect of share dilution for existing shareholders?

d) Something else?

Personal opinion below

(a) Capital is currently king, and till stress tests completed, capital untouched (only exception: cortes ingles)

(b) That is the 1bi question, I stay convinced that BIS3 and banking union will bring M&A. The current available operations are done by clever sellers, before the rush

(c) yes, from day one, the lower minority interests (€500mi) will increase the group EPS, even after dilution (details are in the presentation)

(d) at the basis, this is an opportunistic operation: BSBR is so much under valuated, that this €4.7bi operation is capital neutral, EPS positive despite the 20% premium. A mockery of the anglo-saxon financial world. The same move was done in Mexico: in 2010 SAN bought 25% of BSMX from BAC at a discount. Then in 2012, they IPOed 25% of BSMX with a big profit.

Santander announces an offer to acquire 25% of its Brazilian subsidiary

• The transaction would be paid for with up to approximately 665 million shares of Banco Santander, equivalent to EUR 4,686 million.

• The offer reflects Santander’s confidence in its Brazilian subsidiary and in its long-term growth potential.

• There is no minimum tender condition. Acceptance is voluntary.

• The offer is attractive to Santander Brasil shareholders, who will receive a 20%  premium.

• The offer will appeal to Santander’s shareholders given that it would increase earnings per share as from the first year.

• Santander Brasil would remain listed on the Sao Paulo stock exchange. Santander maintains its policy of operating through subsidiaries independent in terms of capital and liquidity and, if possible, listed.

• Banco Santander’s shares would be listed on the Sao Paulo stock exchange.

Santander Brasil is also moving from BOVESPA segment level 2 to "Traditional". Level 2 requires at least 25% free float.

Here are the requirements for each Bovespa segments (PT)

Santander buys GetNet

Santander Brazil buys GetNet for €350mi
Completion in H2 2014
Reuters with some background info
CNMV filing here (EN) 

Q1 2014

Q1 results: Group presentation: EN, Presentations for each subsidiary: EN (but SCUSA is missing!)
€1.3bi, EPS 0.112

In the press

• elconfidencial
• cincodias

Comments

• Does not include 2 pending capital gains: €385mi (Altamira) and €730mi (SCUSA). Amounts were parked in the balance sheet till decision for usage is taken
• I hate how so few information comes from the Q&A of results presentation. Why could no one (or the investor relationship VP select) ask these 3 questions: 

1. When will dividends be back all cash? What are the plans to support €0.60?
2. In several presentations SAN states a capital surplus of €25bi. Can this be elaborated, in particular its utilization. Why is the Brazil 25% OPA financed by issuing new shares?
3. Effective tax rate in Spain was 29.2%, 130bpp lower than Q1 2013, and 350bpp lower than Q4 2013. To continue? Link with DTA utilization?

• UK shining (and that means Ana Botin strengthens her chances to become group chairman when her farther retires)
• Spain back from the dead but still a long way to improve. The full 2014 guidance for Spain is €1.1bi earnings. Based on Q1 figures can really be reached.  
• Poland, Chile and SCF OK
• US and Mexico with huge costs for growth. In particular SCUSA (and that is why I am pesting on the missing SCUSA specific presentation). UPDATE: SCUSA presentation is available: +61% YoY growth for loan portfolio and +150% for new loans! This is done at constant operating costs (QoQ), with an efficiency ratio at 13.8%!!! NPL down. Provisions up because of upfront provisions building
• Restructuring (merge) in Spain and Poland starting to gives results
• Brazil is a disappointment even at constant exchange rates.

Related News:

• 2014/04/28. Bloomberg article about tomorrow earnings (EN)
• 2014/04/25. 6 Q1 analysts estimates (EN)
• 2014/04/23. Banco do Brasil forecasts for Santander Brasil Q1 2014 net earnings: R$1.36bi, -3.7% QoQ (PT)
• 2014/04/11. Marin: Loans in Spain increased in Q1 2014 for the first time for 5 years: +€450mi (ES)

Q1 2014 is on April 29th. Here are my feelings about next results

The last 3 quarter earnings (Q2, Q3, Q4 2013) were €1.05bi, €1.055bi, €1.06bi.

This goes together with significant exchange rate differences (e.g. BRL/EUR), and booking of significant exceptional gains/costs. I find this regularity interesting. I have awe in front of bank's balance sheet depth, and believe these numbers are sticking to own internal targets (of course in a legal way and derived from a LT detailed business plan). As an example the capital gains booked in Q4 2013 covered the restructuring costs in Spain and Poland. The capital gains excess was parked in the balance sheet as reserve (around €100mi).

2012 was provisioning the real estate in Spain
2013 was balance sheet improvement
Guidance for 2014 and after is return to profitability and growth.

What is the internal target for 2014 EPS? Feeling is that this is not far from €0.55. And this is set in a 3 years plan to return to a €0.6 all cash dividend by 2016 with a payout ratio at around 50%, on the extended number of shares. Of course this target is based on real business expectations, but at LT with some smoothing. In 2014, there are the €700mi capital gains from the SCUSA IPO that allow smoothing.

In total: Q1 2014 EPS around €0.14

An important point is that Q1 2014 capital will be reported as per BIS III rules.
The activation is progressive to 2019.
In 2014, there is the ordinary capital minimum going from 3.5% to 4%, and 20% of the "soft" (not guaranteed to be utilizable) DTA excluded from capital. The €4bi DTA in Brazil is guaranteed by the state and fully kept in capital. Then we have €10bi in Spain. There have been the new Spanish regulations of Dec 2013. Part of €10bi (guaranteed by the state) to be kept in capital (only information I saw is 50-70bpp fully loaded). 20% of the rest (170-190bpp) will be excluded from capital. All this to say that data from competent people is needed and this should be in Q1 2014. Also interesting related to that are the earnings in Spain and effective tax rate in the country. And not sure how the 20% applies in 2014: beginning of the year? progressively? end of 2014?
Later in 2014, we should get positive news from uniformized RWA calculation rules due to EZ banking union.