Nov. 20 (Bloomberg) -- Banco do Brasil SA, Brazil's largest government-controlled lender, is buying a majority stake in Banco Nossa Caixa SA for 5.39 billion reais ($2.25 billion) in cash after 7 months of negotiations to catch up with its bigger rival.

Banco do Brasil, based in Brasilia, is paying 70.63 reais a share for a 71.2 percent stake in Sao Paulo-state-owned lender Nossa Caixa. That is 38 percent more than Nossa Caixa's closing price of 51.30 reais yesterday. Banco do Brasil will pay 18 monthly installments of 299.2 million reais beginning March 2009, the companies said in a statement today.

Negotiations between Banco do Brasil and Nossa Caixa, Brazil's largest regional lender in government hands, intensified after Banco Itau Holding Financeira SA's takeover of Uniao de Bancos Brasileiros SA. That combination bumped the federal lender from its top ranking as Latin America's biggest financial group.

``The price is a little bit higher than I was expecting. So people may be a bit surprised,'' said Pedro Fonseca, an analyst at Keefe, Bruyette & Woods Ltd., in a telephone interview from London. ``Nossa Caixa has got plenty of liquidity, a decent branch network and judicial deposits of Sao Paulo state which is useful. It's a good fit and it's a good asset.''

Market Value

The price per share paid by Banco do Brasil gives Nossa Caixa a market value of 7.6 billion reais, said finance vice- president Aldo Mendes. That's more than the 7 billion reais speculated in Brazilian newspapers during the past month. Brazil's Bovespa stock market is closed today for a holiday.

``The price paid for Nossa Caixa is reasonable compared to some market estimates, but most important is that the payment in cash eliminates our concern of ownership dilution had Banco do Brasil paid for Nossa Caixa in stock,'' said Isa Musa de Noronha, vice-president of Unamibb, an association that represents individual minority shareholders of Banco do Brasil, in a telephone interview from Belo Horizonte.

The acquisition will boost Banco do Brasil's total assets to 512.4 billion reais and total deposits to 264 billion reais, Mendes told reporters today in Sao Paulo. The addition of Nossa Caixa assets still leaves Banco do Brasil 11 percent smaller than Itau Unibanco Holding SA, the combined company being created by the deal announced on Nov. 3, which has 575.1 billion reais in assets.

He said Nossa Caixa minority shareholders will receive the same price paid to the Sao Paulo state government. The purchase will be completed by March 2009. Banco do Brasil said it forecast ``efficiencies'' to generate as much as 4 billion reais over five years.

Brazilian President Luiz Inacio Lula da Silva is pushing Banco do Brasil to regain its position as the country's largest lender.

Further Acquisitions

In September, Banco do Brasil agreed to buy Banco do Estado de Santa Catarina SA, controlled by the state of Santa Catarina, for 685 million reais. The 200-year-old Banco do Brasil also agreed to pay 81.7 million reais, by issuing 2.93 million voting shares, for Banco do Estado do Piaui SA. The lender is also in talks to acquire Banco de Brasilia. The transactions would spur Banco do Brasil's total assets to 502.9 billion reais, still not enough to regain its position as the largest lender in the region.

Lula also helped Banco do Brasil by authorizing the lender on Oct. 22 -- as well as federally controlled Caixa Economica Federal -- to acquire stakes in privately held institutions. With the decree, Banco do Brasil can either use cash or shares to acquire other institutions, instead of only issuing new shares.

``We are open to new opportunities,'' Banco do Brasil President Antonio Francisco de Lima Neto told reporters today.

Nossa Caixa's acquisition will strengthen competition in the Brazilian banking system and benefit consumers, Finance Minister Guido Mantega said today.

Government Assets

A decision on Nov. 4 by the National Justice Council that assets held in escrow can only be managed by government- controlled banks also lessened the potential competition from commercial banks. Almost half of Nossa Caixa's 34 billion reais in total deposits were held in escrow accounts at the end of September.

``Banco do Brasil needs to take this step to reduce its disadvantage to the new player,'' said Daniella Marques, who manages about 1.4 billion reais in assets, including Banco do Brasil shares, at Mercatto Gestao de Recursos in Rio de Janeiro before the deal was announced. ``This deal was already important for Banco do Brasil but now it's a question of avoiding losing ground.''

Banco do Brasil is relying on acquisitions of government- controlled banks to boost its presence in a country where economic growth had created record demand for credit.

``This year we will probably grow between 35 and 40 percent,'' said Banco do Brasil vice president Adezio Lima. ``And we are preparing our budget expecting for next year a total loan portfolio growth of between 20 and 25 percent.''

To contact the reporter on this story: Telma Marotto in Sao Paulo at tmarotto1@bloomberg.net; Fabio Alves in New York at falves3@bloomberg.net.

Last Updated: November 20, 2008 16:53 EST