Jeremy Warner's Outlook: Santander looks to exploit bargain prices

Gold and oil prices surge to records; Latest private equity deal bites the dust
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It's bargain basement time in the banking sector for those with the capital to go shopping. Unfortunately, that's not many. Most Western bankers are in no position to buy. To the contrary, quite a number are forced sellers as they seek to rebuild capital devastated by the sub-prime meltdown. That creates a wealth of buying opportunities at knockdown prices for the few that have money to spend.

Santander, the acquisitive Spanish bank, seems to count itself among them. In a recent interview, chairman Emilio Botin said he wants to expand in Britain, where he already owns Abbey National, and it now transpires that he has been in talks to buy Alliance & Leicester (A&L). Negotiations apparently broke down shortly before Christmas on differences over price, but Mr Botin has let it be known that he is still open to resuming the talks and might be prepared to pay more. A&L is the British mortgage bank whose funding most closely resembles Northern Rock. Its share price has been pounded accordingly.

Yet though A&L relies heavily on wholesale money markets for its funding, its business model is not nearly as extreme as that of Northern Rock. Only around half its funding needs to come from wholesale markets, against 75 per cent at the Rock before the credit markets began to freeze up, and it never pursued growth with quite the same reckless abandon as its northern counterpart.

What's more, the bank recently said it was fully funded until at least the third quarter of this year, having taken steps last summer to refinance itself with longer dated paper. There is no reason to believe A&L will be following Northern Rock in beating a path to the Bank of England's door.

Santander is, meanwhile, one of the very few European banks which saw its share price actually rise last year. This might seem odd given its exposure to the overheated Spanish property market, yet these con-cerns have been offset by the group's strong presence in the emerging markets of Latin America and a very limited exposure to the sub-prime crisis in the US.

Of the three banks that bought ABN Amro last year, Santander also plainly got the best of the spoils, paying a knockdown price for the Latin American assets and quickly selling on the Italian bank Antonveneta for a thumping great profit.

Mr Botin apparently has the money and is determined to play. But is A&L really the right target? A&L may not be bust, yet nor is it exactly a soaraway growth prospect. The UK mortgage market is going to remain subdued for possibly years to come. Significant cost cuts can presumably be obtained by crunching the bank together with Abbey National, and Santander still harbours hopes of becoming a significant player in the commercial British banking market. Even so, the only convincing explanation for Santander's interest is because A&L is cheap. That's going to make finding a price the A&L board can agree to more than a little awkward. There will be lots of forced sellers in the banking sector over the next six months. A&L may reasonably feel it doesn't need to be among them.

Gold and oil prices surge to records

After years of derision, the gold bugs are finally being vindicated. Gold was one of the best performing asset classes last year, surging more than 30 per cent, its biggest rise since 1979. Another nudge yesterday sent the price soaring through the previously recorded record high of $850 an ounce last seen in January 1980.

Yet this apparent revival in the precious metal's attractions is not all it seems. Recent gains are in large measure a result of dollar weakness. In terms of euros or even pounds, the gains don't look so good. Furthermore, in real terms, the price remains far below its 1980 peak.

All the same, it's quite an embarrassment for Gordon Brown, who seemed to dismiss gold as an outdated form of money when he sold off 300m tonnes of the stuff at $275 an ounce, close to a 20-year low, in the late 1990s. His logic in wanting to diversify Britain's reserves into other things may have been correct, but his judgement on timing now looks foolish.

Since then, the safe haven attributes of gold have again come into their own. You can't earn any income from gold, and it's expensive to keep securely, yet in many parts of the world it is still seen as a safer bet than putting your money in a bank account. Northern Rock has shown this to be a quite reasonable way of thinking even here in Britain. Gold is also still the world's most prized metal for jewellery, for which there has been explosive demand as Asian wealth grows.

Gold has always benefited from being the default investment of choice. When all else fails, gold comes into its own.

A record price for oil was also set yesterday. This is a much more worrying phenomenon, for even in real terms oil is now close to its 1980 peak, piling on the pressure for the US eco-nomy at a time when it is still struggling to deal with the body blow of the sub-prime meltdown. The only positive to be drawn from these price movements, which typic-ally would be seen as indicative of very troubled times ahead, is that they are at least demand led.

The oil price is high not just because of geopolitical tensions, but also because of surging demand from the emerging economies of Asia. The oil price shocks of the 1970s were triggered by supply side constraints. Today it is the very strength of the world economy which is causing natural resource prices to climb so steeply.

For the time being, it is impossible to know how these tensions might resolve themselves. Will they plunge the world into recession, or will the momentum of emerging market growth keep pulling us all along behind? It will be some months yet before answers becomes clear.

Latest private equity deal bites the dust

Hard to believe now, but just six months ago no target seemed too big for the ambitions of private equity, and in exaggeration it was being suggested that there would soon be no publicly listed companies left for these financial players to buy.

The cry went up that something had to be done to curtail the excesses of the private equity bandwagon. As it has turned out, the credit markets have been far more effective in puncturing the private equity bubble than ever the politicians were likely to be.

The latest deal to fall foul of the crisis in credit markets is Blackstone's $1.8bn takeover bid for PHH, a US-based mortgage and leasing business. Since the deal was struck last March, the bankers have got cold feet and are now not prepared to go through with the terms as originally agreed. Who is responsible for the $50m break fee, if anyone, is likely to have to be resolved in the courts.

The failure of the PHH take-over is only part of a wider story which has seen debt finance for all but the safest of small time deals virtually dry up. The success of private equity has caused investment funds to pour into the big houses in unprecedented quantities, making them awash with cash. Nonetheless, without access to credit markets, they'll find it tough to deploy the funds profitably, and it may be only a matter of time before one of them is forced to wind up its uninvested millions and hand the money back. Just six months ago, managements could expect support from their shareholders in turning down even quite fancifully priced private equity bids. If private equity thought the company worth such and such, the logic went, then it must be worth a great deal more, since private equity investors would expect to obtain a big return even after paying a silly price for the assets.

Today the tables are reversed, and many of the private equity bids so swiftly rejected as inadequate only a little while back now seem to have been wonderfully overpriced. If offered again, investors would bite their hand off to accept. How quickly the wheel of fortune turns.

j.warner@independent.co.uk

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