Spain’s Santander Said to Weigh Buyout of U.S. Auto Unit

Banco Santander SA, Spain’s largest bank, is considering acquiring the publicly traded shares of its U.S. auto lender as it weighs options for a unit whose stock has tumbled, people with knowledge of the matter said.

Santander Consumer USA Holdings Inc.’s shares had fallen by about a quarter since a January initial public offering, leaving the listed stake -- about 28 percent of the company -- valued at $1.8 billion as of yesterday. Santander views the unit as an undervalued asset that may perform better off the public markets, three of the people said, asking not to be identified discussing private information.

While it hasn’t appointed a financial adviser, the Spanish bank has discussed the matter with several firms as it reviews options for its 60 percent stake in Dallas-based Santander Consumer. No final decision has been made and Santander could choose to do nothing, the people said.

Santander Consumer is one of the largest originators of subprime car loans in the U.S., helping car buyers with poor credit get financing through dealerships. With a purchase, Madrid-based Santander could reclaim a stake it sold during Europe’s financial crisis as it sought to raise capital.

A spokesman for Santander declined to comment when contacted by phone today.

January IPO

The bank sold a quarter of Santander Consumer to a group of private-equity funds in 2011, who have since offloaded most of their stake in a January IPO and September follow-on offering.

The share rose 10 percent to $20.17 as of 10:21 a.m. in New York today, giving Santander Consumer a market value of about $7 billion. Santander, down about 3.5 percent in Madrid trading, has a market value of about 88 billion euros ($110 billion).

Even after today’s gain Santander Consumer’s shares remain below the IPO price, as heightened scrutiny of the subprime auto lending market that has spooked investors. The company said in an August filing that it received a civil subpoena from the U.S. Department of Justice relating to the underwriting and securitization of subprime auto loans.

One consideration for Santander is that Santander Consumer investors could balk at an offer that’s below the $24-per-share price the company fetched in its IPO, one person said. At the same time, the buyout is appealing to Santander which wants to shore up its position in the North American auto lending market, the people said.

The U.S. auto-industry is on track to sell more than 16 million cars and trucks this year, the most since 2007, data compiled by Bloomberg show, as consumer confidence and low-borrowing costs spur purchases.

Santander Brasil

The deal Santander is weighing for Santander Consumer could resemble an offer in October to buy up to a quarter of its Brazilian unit, another subsidiary with a lackluster stock price, one of the people said.

That deal helped Santander boost the type of loss-absorbing capital regulators force banks to hold, said Benjie Creelan-Sandford, an analyst with Macquarie Group Ltd. in London. A similarly-structured stock-based deal for Santander Consumer could further add to capital levels because issuing stock increases a bank’s capital.

Also, new regulatory rules mean banks can no longer count certain stakes that outsiders own in their subsidiaries toward their capital cushion -- an incentive for lenders to own as much of their operating units as possible, he said.

“The group’s capital position continues to be quite weak,” Creelan-Sandford said. “Therefore, we have seen them in the past be willing to do various sorts of transactions with their subsidiaries.”

Because it already controls Santander Consumer, the investment is unlikely to face resistance from regulators making it an appealing option, one of the people said.

Santander Consumer’s Chief Executive Officer Thomas Dundon owns 10 percent of the company, data compiled by Bloomberg show. The group of buyout funds which bought 25 percent during the crisis --- including Warburg Pincus and KKR & Co. -- now owns about 1.2 percent.

Santander raised $1.15 billion in 2011 selling a stake in Santander Consumer to Dundon and the private-equity firms.

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