Monday, October 13, 2008

Sovereign Bancorp (NYSE:SOV): Could a Deal with Santander be Imminent? - MSCO

Morgan Stanley has some interesting comments on Sovereign Bancorp (NYSE:SOV) noting the co is in late-stage talks topotentially be acquired by Banco Santander (already a 24.9% owner of SOV), according to an article published by the Wall Street Journal late Sunday evening. According to the WSJ, a deal could be announced as early as Monday with a deal price of roughly where SOV shares closed on Friday at $3.81. Neither company has commented on the potential transaction.

Selling out at the wrong time for the wrong price?

Firm's initial reaction is that they would be quite surprised if Sovereign management were to sell the company at the current stock price. Friday’s closing price is just 58% of its estimated 3Q08 tangible book value per share of $6.61, and well below where the overall midcap bank group is trading at 1.6x. Their view is that after disclosing and writing-off its poor-performing GSE and CDO investments, the company had put its most pressing problems behind it. Unless the company has not disclosed a material adverse item (which is possible), they see little reason why the stock should be trading substantially below its tangible book value.

Potential Treasury actions a near-term positive: In addition, if the Treasury were to announce a plan to guarantee bank deposits and liabilities through preferred equity, as suggested by MSCO chief US economist, in an effort to restore confidence in the US banking system, SOV’s closing price on Friday may prove to be much too low. Any improvement in confidence in the banking system could indirectly result in a much higher equity valuation for the SOV shares.

Reits Overweight, $9 tgt.

Notablecalls: Just fyi - not making a call ahead of a potential announcement.

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