Oct. 5 (Bloomberg) -- Banco Santander SA’s Brazilian unit may sell shares near the top of its price range as it seeks to raise as much as 13.1 billion reais ($7.4 billion) from investors betting the nation’s economic growth will spur profit.

Spain’s biggest bank is offering shares at between 22 reais to 25 reais in a transaction that will be priced tomorrow.

“It could price towards the top of the range,” said Clecius Peixoto, who helps manage $12 billion at Emerging Markets Management LLC in Arlington, Virginia. “Even though it’s ambitious, it’s going to attract a lot of demand because it will draw in a lot of crossover investors.” Peixoto said he will make his decision on whether to participate “at the last minute” after meeting with management today.

Brazilian companies such as real estate developer Cyrela Brazil Realty SA and toll-road operator Cia. de Concessoes Rodoviarias filed to sell shares in the past five weeks as the benchmark Bovespa stock index extended its gain this year to 63 percent. Santander’s sale would be Brazil’s biggest, topping the record 8.4 billion reais raised by credit card payment processor Cia. Brasileira de Meios de Pagamento in June, should the company sell at the high end of the price range.

Santander plans to sell 525 million units, each representing 55 common shares and 50 preferred shares of Banco Santander (Brasil) SA in Sao Paulo. The shares underlying the offering equal 16.2 percent of the bank’s current share capital. The underwriter, Credit Suisse Group AG, has the option to sell an additional 100 million units depending on investor demand. The shares start trading Oct. 7.

‘Lot of Heat’

“There’s a lot of heat around these deals and it could come in nearer the high end,” said Maclovio Pina, an analyst at Morningstar Inc. in Chicago. He said the offer was “fairly valued” roughly in the middle of its price range.

A spokesman for Santander in Madrid, who asked not to be named in line with company policy, declined to comment. Gavin Sullivan from Credit Suisse’s press office declined to comment.

Santander built the Brazilian lender through acquisitions. In 2000, it bought Banco de Estado de Sao Paulo for $4.8 billion, and in 2007, it acquired ABN Amro Holding NV’s Banco Real unit for 11 billion euros ($16 billion). Santander, based in Santander, Spain, is betting on Brazil as economic expansion and growing wealth push more people into the middle class, increasing demand for banking services, the bank’s Latin American chief, Francisco Luzon, said in a July speech.

The sale may value Santander’s Brazilian unit at more than 30 billion euros, about the same market value as Societe Generale or Deutsche Bank AG.

Less Profitable

The bank’s task is to persuade people to allocate funds invested in profitable Brazilian banks such as Itau Unibanco Holding SA to its own unit, Peixoto said. The Santander unit had a return on equity, a measure of profitability, of 10.3 percent in 2008, compared with more than 20 percent at Itau.

Walter Mundell, a partner at wealth management firm WMundell Consultores in Sao Paulo, said Santander faces competition for equity investors given the outlook for share sales in Brazil this month.

“I’m not sure it’s the best time to approach the market with this transaction,” Mundell said. “It might not be easy for Santander to get the price they want.”

Santander won’t be able to sell shares at a premium to Sao Paulo-based Itau or Banco Bradesco SA, the country’s second- biggest non-state bank, said Frederico Sampaio, who helps manage 660 million reais as head of equities at Franklin Templeton Investimentos Brasil in Sao Paulo.

“It’s a branch of an international bank, which gives it less decision power locally, and it’s also smaller,” Sampaio said. “Actually it should trade as a discount.”

‘Extra Kicker’

Santander’s pricing range implies a price of 1.5 times book value, a discount of about 50 percent to Brazilian banks such as Osasco-based Bradesco, according to Pina of Morningstar.

“The deal looks relatively fully valued,” said Kim Catechis, who oversees about $2.5 billion in emerging markets funds at Scottish Widows Investment Partnership in Edinburgh. “It’s certainly not a giveaway.”

Speaking to analysts in Sao Paulo last year, Santander Chief Executive Officer Alfredo Saenz called Brazil “our extra kicker.” He predicted the unit would boost its own net income by two-thirds to 7.9 billion reais in 2010.

Analysts at Evolution Securities in London today estimated that the unit may earn 4 billion euros, the equivalent of 10.4 billion reais, by 2011, making it the biggest contributor to Santander’s profit. The Brazilian division may be worth 41 billion euros, they said.

Santander plans to open 600 branches in Brazil by 2013 and forge new business with companies and homebuyers, the bank said in the prospectus for the share sale.

‘Good Business’

“For any bank that has the balance sheet to support it, banking in Brazil is going to be a good business,” said Carlos Camacho, who helps manage about 3 billion reais at GAP Asset Management in Rio de Janeiro.

Camacho said he was impressed by Santander’s potential to boost profitability by developing businesses in Brazil such as mortgage lending, and that it was “quite possible” he’d buy the Brazilian shares.

“People are looking at the bigger issues like Santander’s, and that’s where the money is heading,” said Bill Rudman, who helps manage $1.5 billion in emerging-market stocks at Blackfriars Asset Management in London and attended a roadshow for the sale on Oct. 2.

‘Doing Their Homework’

With bank lending set to shrink in Spain, Santander is betting on growth in Brazil and the U.K., where its Abbey unit is increasing market share, said Arturo de Frias, an analyst at Evolution Securities in London, who has a “buy” rating on Santander shares.

Santander rose 33.5 cents, or 3.2 percent, to 10.75 euros today in Madrid. The shares have climbed 59 percent this year, compared with a 26 percent increase in Spain’s benchmark IBEX 35 index.

“They’re doing their homework two years in advance, taking an opportunity to fund Brazilian growth,” de Frias said. Itau trades at about 3.7 times estimated book value compared with 1.4 times for Santander, meaning the Spanish bank can take advantage of the premium enjoyed by Brazilian lenders, Rudman said.

Economy Outperforms

Brazil’s economy will grow 4.5 percent next year, according to a central bank survey of about 100 economists published last week. Spain’s government expects gross domestic product to shrink 0.3 percent in 2010.

By raising money for Brazil, Santander also takes pressure off its funding needs at the group level, where it has boosted capital to absorb mounting loan losses, de Frias said.

“This is going to be welcomed by investors who will have a better benchmark for comparisons with existing Brazilian banks,” said Christopher Palmer, who oversees about $5 billion as head of global emerging markets at Gartmore Investment Management Ltd. in London.

The benchmark Bovespa index rose 1.4 percent to 61,171.99 last week, led by Vivo Participacoes SA, Brazil’s largest mobile-phone carrier, which advanced 10 percent. Homebuilder Rossi Residencial SA dropped the most among stocks in the index with a 10 percent decline.

The yield on the government’s zero-coupon bonds due January 2010 fell 3 basis points to 8.69 percent, according to Banco Votorantim. The real strengthened 0.5 percent to 1.7808 per U.S. dollar, from 1.7901 on Sept. 25.

The following is a list of events in Brazil this week:

Event                                         Date
Trade Balance (FOB - Weekly)                 Oct. 5
Vehicle Sales, Production, Exports (Anfavea) Oct. 5-9
FGV Inflation IGP-DI                         Oct. 6
CNI Capacity Utilization                     Oct. 7
FGV CPI IPC-S                                Oct. 8
IBGE Inflation IPCA (MoM and YoY)            Oct. 8
IBGE Inflation INPC (MoM)                    Oct. 8
FIPE CPI (Weekly)                            Oct. 9
FGV Preview Inflation IGP-M                  Oct. 9

To contact the reporter son this story: Charles Penty in Madrid at cpenty@bloomberg.net

Last Updated: October 5, 2009 11:58 EDT