* Santander unit is Mexico’s third-biggest bank
* Worries over Spain’s economy could hurt offer
* Listing cashes in on investor optimism on Mexico
By Elinor Comlay and Krista Hughes
MEXICO CITY, Aug 31 (Reuters) – Banco Santander (SAN.MC)
will make a splash with a multi-billion-dollar float of its
Mexican operation next month, although investors will probably
demand a discount to hedge against its links to crisis-ridden
Spain.
The listing, which is due in Mexico and New York on
September 25 and looks on track to become the biggest ever on
the Mexican stock exchange, seeks to take advantage of investor
optimism in Mexico. [ID:nL2E8JO1BM]
Mexico’s move out of Brazil’s shadow has driven the
benchmark IPC stock index .MXX to outperform the Bovespa
.BVSP so far this year. The Santander listing could encourage
other firms to follow suit.
Santander, whose rivals in Mexico are also mostly
foreign-owned, hopes to raise $3 billion to $4 billion for a 25
percent stake in its Mexican unit, which has a healthy capital
base, an expanding loan book and is No. 2 in Mexico’s mortgage
market.
Investors in Mexico seem hungry for a stock that will help
diversify their holdings in a market dominated by giant telecom
companies and retailers. [ID:nL2E8JS6K6]
But as bank shares globally have demonstrated in the last
several years, strong capital and a healthy balance sheet are
not enough to sustain a stock price in the face of crisis.
Santander Mexico may find it hard to shake off a perception it
is exposed to its Spanish parent’s woes.
“There could be some reputational risk effect, from the
association with the Santander name,” said Alejandro Garcia, an
analyst with Fitch Ratings in Monterrey, Mexico.
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For a FACTBOX on Santander’s Mexico unit [ID:nL2E8JL6TU]
For a map graphic, see link.reuters.com/wub32t
Santander share graphic link.reuters.com/bad42t
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Pricing for the deal has not been released, but will be
gauged during roadshows in coming weeks in New York, London and
Mexico City.
VALUATION
A price tag of up to $4 billion for a stake of 25 to 30
percent would imply a price-to-book ratio – that is, the ratio
of Santander’s implied share price to the value of its assets –
of between 1.9 and 2.3, according to a Nomura report published
earlier this month, before the size of the offer was fixed.
That range values Santander Mexico on par with or at a
discount to its closest listed rival, Banorte (GFNORTEO.MX),
Mexico’s fourth-largest bank by assets. Its shares are currently
trading at about 2.3 times its book value after soaring 60
percent in the last year, although they slipped slightly this
month.
Banorte’s stock gain reflected a stellar year, helped by the
strengthening Mexican economy and a pick-up in demand for
borrowing that helped the bank’s loan book expand 24 percent in
the 12 months through July.
Santander Mexico’s loan book has increased 14 percent over
the same period. It stands to benefit from the same stable
interest-rate environment that has helped Banorte, and some
investors are confident the local unit’s strength will help it
fend off pressure over its Spanish ties.
Banco Santander and Santander Mexico have “completely
separate books, separate markets, separate loan portfolios,”
said Heiner Skaliks, portfolio manager at the Strategic Latin
America Fund. “It would not be a justifiable discount because of
the separation of books.”
While the bank’s Spanish parent is largely separate from its
Mexican unit, concern about Spain will still affect the stock,
analysts say. Some said Santander’s valuation could fall even
further below its outperforming peer Banorte if investors start
to think that a Spanish banking crisis could spark contagion
that would hurt even well-capitalized banks and their
subsidiaries, as happened to U.S. financial institutions in 2008
and 2009.
“The multiple (to book) could be affected by investor risk
aversion to the name and also to the banking sector in general,”
said Fitch’s Garcia.
Another worry is that if the parent company in Spain should
need extra capital, it could look to sell additional shares in
the Mexican unit down the road, watering down the holding of
investors who buy in with next month’s offering.
“That would put an overhang (on the shares),” said Ed
Kuczma, investment analyst for two emerging market funds with
$240 million in net assets under management at Van Eck Global.
“The problems with Spain are well known right now, so I
think investors will probably demand a larger discount than
normal in terms of valuation due to these factors.”
When Santander in Spain needed to raise 15.3 billion euros
earlier this year to meet a new capital requirement, it did so
in part by selling stakes in Brazil, Chile and elsewhere.
Those listed units’ shares have suffered as the parent has
been buffeted by bad news in Spain, particularly in July, when
the country began to discuss a potential bailout.
Santander has said it plans to use the proceeds of the sale
for general corporate purposes, and many in the market expect
most of the money raised to be sent to Spain.
The listing will be the third this year on Mexico’s stock
exchange and even if it falls short of $3 billion to $4 billion,
it is still likely to beat the $2.2 billion float of telephone
firm Telmex, which has held the record for Mexico’s biggest IPO
since 1991, and may encourage other companies to follow suit.
“Any new issues, as long as they are priced appropriately –
and the corporate governance of the company is good, they have
got good prospects – are a positive thing for the local market,”
said fund manager Nick Morse, who oversees Schroders Investment
Management’s $740 million Latin America equity fund.
(Additional reporting by Tomas Sarmiento and Dave Graham in
Mexico City and Carlos Ruano in Madrid; Editing by Simon
Gardner, Kieran Murray and Dan Grebler)
((Elinor.Comlay@thomsonreuters.com)(+52 55 5282 7154)(Reuters
Messaging: elinor.comlay.thomsonreuters.com@reuters.net))
Keywords: MEXICO SANTANDER/
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