M&T and Santander ... This Could Actually Make Sense

Rumor going around is that Spanish banking giant Santander (NYSE: STD) may consider a bid for the exceptionally well-run M&T Bank (NYSE: MTB). If this happens to be true, it is a deal I would probably like ... at the right price, of course.

For those not familiar with it, MTB is a Buffalo-based bank with operations across the Mid-Atlantic. While the return on equity and return on assets do not immediately jump out as top-tier, it is widely considered one of the best-run banks in the country. I happen to share that opinion, and would group it along with the likes of US Bancorp (NYSE: USB) and BB&T (NYSE: BBT) as some of the best-run banks in the country. As such, they have not been hurt quite so badly by the housing/credit boom and bust.

What makes this an intriguing deal is that Santander is also an exceptionally well-run bank, even if it carries the "Scarlet S" of being a Spanish bank. Santander gets about 25% of its profits from Spain, with 21% coming from Brazil, 14% from "other" Latin American countries, 12% from the UK, but only a tiny bit (about 2%) from its US business (from its acquisition of Sovereign a few years back). Although the U.S. is not an under-banked market by any means, it is a profitable one and it is reasonable to think STD would have interest.

The opening for Santander is coming, ironically enough, from problems at another large European bank. MTB is 25%-owned by Allied Irish Banks (NYSE: AIB), a good-enough bank when times were good in Ireland. Times are not nearly so good now, though, and AIB is under pressure to raise capital. With MTB shares near a 52-week high, selling that stake could be a very appealing means of generating that needed capital.

Ahhh, but now for the "but". In this case, the "but" is valuation. Even if I stretch some of my assumptions about future growth, I have a tough time going above $100 per share in fair value. Given the restrictions on moving deposits across borders (collecting deposits in Buffalo to fund loans in Buenos Aires is frowned upon), there would not be a lot of synergies for Santander. So, the question for me is whether Santander can basically position AIB over the barrel and strike a bargain price on the stake (as large blocks of stock often move at discounts, similar to public share offerings), and use some of that to offset the takeover premium it will have to pay to buy a controlling stake.

Then again, that assumes that Santander wants, or feels it needs, full control. They could, conceivably be content with just holding that sizable stake and cashing dividend checks.

Personally, I don't think this deal happens I'm coming around to the idea that this deal eventually gets done. It makes sense, but I'm not sure Santander is in a position to do anything quite so bold, and I'm not sure AIB wants to let go of its MTB stake if it has other options to avoid it. Still, should the deal happen, it has the advantage of being a combination of two very well-run banks. As it stands now, Santander is a stock that is definitely on my watch list whether the deal happens or not. 

I wrote that prior paragraph last night, and after sleeping on it, I'm changing my mind. I think the odds of a deal are at least 50-50. Santander has a lot of pressures at home and the capital stress tests going on in Europe now might limit just how bold Santander can be. Nevertheless, AIB will have almost no choice but to sell its stake and Santander is clearly interested in expanding its U.S. footprint. If the deal happens, it's a marriage of two very well-run banks. But even if the deal does not go off, I would be happy owning either bank. As it stands now, Santander looks cheap and it is definitely on my watch list. 

Full disclosure - I own share of BBT

In the original posting I forgot to mention that M&T and Santander have talked before about a merger. I apologize for not mentioning that as it certainly ups the odds of a transaction.