Banco Santander’s Capital Raising Operation Will Have A Higher Discount Than Market Expectations

Banco Santander's capital increaseBanco Santander's chairman Ana Patricia Botín

Banco Santander will raise 7.072,4 billion euros as expected via a rights issue in order to “provide sufficient coverage for the acquisition of 100% of Banco Popular’s capital.”  The preference subscription period for the issue will last 15 calendar days, running from this Thursday 6 July to Thursday 20 July, both days included.

The operation will consist in issuing 1.458,2 million new shares at 4,85 euros/share, including the nominal value of 0,5 euros plus an issue premium of 4,35 euros/share. This capital hike implies a discount of 17.75% with respect to theoretical price excluding the subscription right.

Those who want to subscribe to one new share will need 10 preference subscription rights, taking into account that every share in circulation provides the holder with one preference subscription right.

The rights issue will close on July 27, the eve of Banco Santander’s second quarter results presentation. The new shares will begin to trade on the last day of the month. Four days later the first interim dividend against this year’s results will be paid out. This will be for a total of 0,06 euros per share and the holders of shares from the capital raising transaction will have a right to receive the dividend.

The preference subscription rights will trade on the stock markets in Madrid, Barcelona, Bilbao, Valencia, Lisbon and Buenos Aires. Those preference subscription rights which are not taken up will automatically disappear when the period ends.

The capital hike is “fully underwritten”, the bank has told the stock markets’ regulator. It has signed an underwriting and placement contract for the total amount with a syndicate of banks. The joint global coordinators will be Santander, Citigroup Global Markets Limited and UBS Limited.

Analysts’ opinion: a big discount

“We expect a negative reaction from the share price given the big discount included in the capital raising, in contrast to what the market predicted,” Renta 4 analysts say. They are recommending to be Overweight in the stock, with a target price of 6,18 euros/share.

Link Securities believe that “both from a financial and strategic point of view, the transaction is positive for Banco Santander,” although they recall that “we shouldn’t forget the fact that, as happens in all these types of integration deals, there is an execution risk.” As a result, these experts remain cautious, saying they will analyse and update their recommendation on the stock in the coming days.

Bankinter analysts highlight that the discount is bigger than they estimated (a range of -7%/-10%). “This discount has been agreed on at the request of the underwriters and the banks handling the capital raising operation in order to guarantee its success.”

“We believe the share price could be penalised, although it won’t drop to 4,85 euros,  the price at which the rights issue is being carried out,” Bankinter said in its daily analysis report. It says the share price could end up in the range of 5-5,5 euros.